SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement ( ) Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CIRCUIT CITY STORES, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule, or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
CIRCUIT CITY STORES, INC.
December 24, 1996
Dear Shareholder:
A Special Meeting of Shareholders of Circuit City Stores, Inc. (the
"Company") will be held at 8:00 a.m., Eastern Time, on January 24, 1997 at the
offices of McGuire, Woods, Battle & Boothe, L.L.P., One James Center, 901 East
Cary Street, Richmond, Virginia.
At the Special Meeting, you will be asked to consider and approve the
CarMax Stock Proposal being recommended by the Board of Directors in order to
effect a comprehensive plan that will result in a restructuring of the existing
Common Stock into two new series of Common Stock intended to reflect separately
the performance of each of the Company's two principal businesses -- its
consumer electronics and appliances retail business, including the Circuit City
Group's interest in the CarMax Group (the "Circuit City Group"), and its used-
and new-car retail business (the "CarMax Group"). The CarMax Stock Proposal will
not result in a distribution or spin-off of any assets or liabilities of the
Company or its subsidiaries.
The CarMax Stock Proposal was adopted by the Board of Directors following
its review of various alternatives for raising additional capital to finance the
Company's expansion plans for the CarMax Group. The Board of Directors believes
the historical price performance of the existing Common Stock fails to reflect
adequately the value associated with the CarMax Group, thus preventing the
Company's shareholders from realizing the full value of their shares. The CarMax
Stock Proposal will permit separate market valuations of the Circuit City Group
and the CarMax Group and permit investors to invest in a stock related solely to
the Circuit City Group or the CarMax Group. It also will (i) allow the Company
to preserve financial, strategic and operational benefits it currently enjoys as
a single company, (ii) provide the Company with an additional equity security
that can be used to raise capital and can be issued in connection with
acquisitions and investments, (iii) maintain flexibility that would not be
available if the two Groups were separate legal entities and (iv) provide a
better framework to structure for employees of each Group incentive plans that
can be tied directly to both the business results and the stock price
performance of such Group.
The key elements of this plan are as follows:
(Bullet) CREATION OF CARMAX STOCK. The Company's Amended and Restated
Articles of Incorporation will be amended to permit the creation of a new series
of Common Stock to be called Circuit City Stores, Inc. -- CarMax Group Common
Stock (the "CarMax Stock"), which is intended to reflect separately the
performance of the CarMax Group.
(Bullet) REDESIGNATION OF EXISTING COMMON STOCK. Each share of the
Company's existing Common Stock will be redesignated as one share of a new
series of Common Stock to be called Circuit City Stores, Inc. -- Circuit City
Group Common Stock ("Circuit City Stock"), which is intended to reflect
separately the performance of the Circuit City Group, including the Circuit City
Group's interest in the CarMax Group.
(Bullet) INITIAL PUBLIC OFFERING OF CARMAX STOCK. Subject to the approval
by the Company's shareholders of the CarMax Stock Proposal and to prevailing
market conditions, the Company currently plans to offer to the public for cash
shares of CarMax Stock that would initially represent 15% to 20% of the equity
value of the CarMax Group. The Company plans to use the proceeds of such
offering to finance part of its expansion plans for the CarMax Group and to
repay the CarMax Group's allocated portion of Company indebtedness. Upon the
completion of the public offering, the Circuit City Group would hold the balance
of the equity value of the CarMax Group.
Prior to the Special Meeting of Shareholders, the Company intends to
distribute to all shareholders entitled to vote at the meeting a supplement to
these proxy materials setting forth certain additional information regarding the
proposed public offering of CarMax Stock, including the number of shares
anticipated to be sold, the anticipated range of prices at which the shares
would be sold and the amount of net proceeds expected to be raised in the
offering.
The Board of Directors currently intends to pay dividends on the Circuit
City Stock at an initial quarterly rate of 3.5(cents) per share, which is equal
to the quarterly dividend rate on the Company's existing Common Stock. With
regard to the CarMax Stock, the Board of Directors currently intends to retain
future earnings, if any, for the development of the business of the CarMax Group
and does not anticipate paying dividends on the CarMax Stock in the foreseeable
future.
At the Special Meeting, you also will be asked to consider and approve
three related proposals that would (i) amend the Company's Amended and Restated
Articles of Incorporation to increase the number of shares of Common Stock
authorized for issuance from 250,000,000 to 350,000,000 in order to provide
greater assurance that a sufficient number of shares would be available in the
event of a conversion of one series of Common Stock into the other series, (ii)
amend the Company's 1994 Stock Incentive Plan to authorize the granting of stock
awards in either Circuit City Stock or CarMax Stock, or both, to reserve shares
of CarMax Stock for issuance pursuant to awards made under such plan and to
permit the conversion of certain
<PAGE>
existing options into options to acquire shares of CarMax Stock, and (iii) amend
the Company's Annual Performance Based Bonus Plan to permit awards under such
plan to be based on designated criteria related to the performance of each
Group. You also will be asked to consider and approve additional amendments to
the Company's Amended and Restated Articles of Incorporation to conform certain
provisions thereof to the current provisions of the Virginia Stock Corporation
Act and to delete certain provisions thereof that have expired.
The Board of Directors has carefully considered the terms of the CarMax
Stock Proposal and the related and other proposals and believes their adoption
is in the best interests of the Company and its shareholders. Accordingly, the
Board of Directors unanimously has recommended their approval by the
shareholders. In arriving at its recommendation, the Board of Directors has
given careful consideration to a number of factors, including those described in
the accompanying Proxy Statement. Among the factors considered by the Board of
Directors were (i) the more complex capital structure resulting from the CarMax
Stock Proposal which could inhibit the efficient valuation of either or both
series of Common Stock, (ii) the fact that holders of Circuit City Stock and
CarMax Stock would continue to be subject to the risks associated with an
investment in a single company and all of the Company's businesses, assets and
liabilities and (iii) the potential diverging interests of the two Groups and
the issues that could arise in resolving such conflicts. However, the Board of
Directors has determined that, on balance, the positive aspects of the CarMax
Stock Proposal, including those discussed above, outweigh such potentially
adverse consequences.
Please give these proxy materials your careful attention. BECAUSE THE
AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF
EXISTING COMMON STOCK IS REQUIRED TO APPROVE THE AMENDMENTS TO THE COMPANY'S
AMENDED AND RESTATED ARTICLES OF INCORPORATION, INCLUDING THE AMENDMENTS TO
PERMIT THE IMPLEMENTATION OF THE CARMAX STOCK PROPOSAL, SHARES THAT ARE NOT
VOTED WILL HAVE THE EFFECT OF A VOTE AGAINST SUCH AMENDMENTS. ACCORDINGLY, IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL MEETING,
REGARDLESS OF THE SIZE OF YOUR HOLDINGS. Please complete, sign, date and return
the accompanying proxy card in the enclosed envelope in order to make certain
that your shares will be represented at the Special Meeting.
PLEASE NOTE THAT 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 THE COMPANY. IF YOUR SHARES ARE REGISTERED IN
YOUR NAME AND YOU PLAN TO ATTEND THE MEETING, PLEASE MARK THE APPROPRIATE BOX ON
THE ENCLOSED PROXY CARD, AND YOU WILL BE PREREGISTERED FOR THE MEETING.
Sincerely,
/s/ RICHARD L. SHARP
------------------------------
RICHARD L. SHARP, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
IMPORTANT: YOUR PROXY CARD IS ENCLOSED IN THE
ADDRESS WINDOW OF THE ENVELOPE CONTAINING THIS MATERIAL
<PAGE>
CIRCUIT CITY STORES, INC.
9950 Mayland Drive
Richmond, Virginia 23233
----------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JANUARY 24, 1997
----------------------------------------------------------------
TO THE HOLDERS OF CIRCUIT CITY STORES, INC. COMMON STOCK:
A Special Meeting of Shareholders of Circuit City Stores, Inc. (the
"Company") will be held at the offices of McGuire, Woods, Battle & Boothe,
L.L.P., One James Center, 901 East Cary Street, Richmond, Virginia on Friday,
January 24, 1997, at 8:00 a.m., Eastern Time, for the following purposes:
1. To consider and vote upon a proposal to authorize certain amendments to
the Company's Amended and Restated Articles of Incorporation (the
"Articles of Incorporation") that would:
(a) provide for the issuance of the Company's Common Stock in series by
action of the Board of Directors, of which 125,000,000 shares would
initially be designated by the Board of Directors as Circuit City
Stores, Inc. -- Circuit City Group Common Stock ("Circuit City
Stock") and 125,000,000 shares would initially be designated as
Circuit City Stores, Inc. -- CarMax Group Common Stock ("CarMax
Stock"), with the preferences, limitations and relative rights as
are described in the accompanying Proxy Statement; and
(b) redesignate each outstanding share of the Company's existing Common
Stock as one share of Circuit City Stock.
2. To consider and vote upon a proposal to further amend the Articles of
Incorporation, as described in the accompanying Proxy Statement, to
increase the number of shares of Common Stock authorized for issuance
from 250,000,000 to 350,000,000;
3. To consider and vote upon a proposal to further amend the Articles of
Incorporation, as described in the accompanying Proxy Statement, to
conform certain provisions thereof to the current provisions of the
Virginia Stock Corporation Act and to delete certain provisions thereof
that have expired;
4. To consider and vote upon a proposal to amend the 1994 Stock Incentive
Plan; and
5. To consider and vote upon a proposal to amend the Annual Performance
Based Bonus Plan.
Only holders of record of shares of the Company's Common Stock at the close
of business on December 11, 1996, will be entitled to attend and vote at the
meeting and any adjournments thereof.
Your vote is important. BECAUSE THE AFFIRMATIVE VOTE OF THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF EXISTING COMMON STOCK IS REQUIRED TO
APPROVE THE AMENDMENTS TO THE ARTICLES OF INCORPORATION, INCLUDING THE
AMENDMENTS TO PERMIT THE IMPLEMENTATION OF THE CARMAX STOCK PROPOSAL, SHARES
THAT ARE NOT VOTED WILL HAVE THE EFFECT OF A VOTE AGAINST SUCH AMENDMENTS.
Accordingly, please complete, date, sign and return the enclosed proxy promptly
in the enclosed envelope.
By Order of the Board of Directors
/s/ MICHAEL T. CHALIFOUX
-------------------------------
MICHAEL T. CHALIFOUX, SECRETARY
December 24, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
GLOSSARY OF DEFINED TERMS............................................................................................ iii
PROXY STATEMENT...................................................................................................... 1
SPECIAL MEETING OF SHAREHOLDERS...................................................................................... 1
SUMMARY COMPARISON OF TERMS OF EXISTING COMMON STOCK
WITH TERMS OF CIRCUIT CITY STOCK AND CARMAX STOCK.................................................................. 4
PROXY STATEMENT SUMMARY.............................................................................................. 11
RISK FACTORS......................................................................................................... 19
GENERAL.............................................................................................................. 25
COMMON STOCK PRICE RANGE............................................................................................. 26
PROPOSAL 1 -- THE CARMAX STOCK PROPOSAL.............................................................................. 27
General............................................................................................................ 27
Background and Reasons for the CarMax Stock Proposal............................................................... 27
Recommendation of the Board of Directors........................................................................... 29
Dividend Policy.................................................................................................... 29
Certain Management and Allocation Policies......................................................................... 29
Description of Circuit City Stock and CarMax Stock................................................................. 31
Inter-Group Interest............................................................................................... 42
Stock Transfer Agent and Registrar................................................................................. 43
Stock Exchange Listings............................................................................................ 44
No Dissenters' Rights.............................................................................................. 44
Certain Federal Income Tax Considerations.......................................................................... 44
Restated Rights Agreement.......................................................................................... 46
Anti-takeover Considerations....................................................................................... 48
PROPOSAL 2 -- AMENDMENT TO ARTICLES OF INCORPORATION RELATING TO
INCREASED AUTHORIZATION OF COMMON STOCK............................................................................ 50
Vote Required........................................................................................................ 50
Recommendation of the Board of Directors............................................................................. 50
PROPOSAL 3 -- AMENDMENTS TO ARTICLES OF INCORPORATION
RELATING TO ISSUANCE OF PREFERRED STOCK IN SERIES
BY ACTION OF THE BOARD OF DIRECTORS
AND DELETION OF EXPIRED PROVISIONS................................................................................. 51
Vote Required...................................................................................................... 51
Recommendation of the Board of Directors........................................................................... 51
PROPOSAL 4 -- AMENDMENTS TO 1994 STOCK INCENTIVE PLAN................................................................ 52
General............................................................................................................ 52
Amendments to 1994 Plan............................................................................................ 52
Description of 1994 Plan as Proposed to be Amended................................................................. 52
Federal Income Tax Consequences.................................................................................... 54
1994 Plan Benefits Table........................................................................................... 55
Vote Required...................................................................................................... 55
Recommendation of the Board of Directors........................................................................... 55
PROPOSAL 5 -- AMENDMENTS TO ANNUAL PERFORMANCE BASED BONUS PLAN...................................................... 56
General............................................................................................................ 56
Amendments to Bonus Plan........................................................................................... 56
Description of Bonus Plan as Proposed to be Amended................................................................ 56
Vote Required...................................................................................................... 57
Recommendation of the Board of Directors........................................................................... 57
EXECUTIVE COMPENSATION............................................................................................... 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................... 61
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............................................................ 62
INDEPENDENT AUDITORS................................................................................................. 62
PROPOSALS BY SHAREHOLDERS FOR PRESENTATION
AT THE 1997 ANNUAL MEETING......................................................................................... 62
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
------
Annex I -- Illustrations of Certain Terms............................................................................ I-1
<S> <C>
Annex II-A -- Amendments to the Articles of Incorporation Relating to Proposal 1..................................... II-A-1
Annex II-B -- Amendment to the Articles of Incorporation Relating to Proposal 2...................................... II-B-1
Annex II-C -- Amendments to the Articles of Incorporation Relating to Proposal 3..................................... II-C-1
Annex III -- 1994 Employee Stock Incentive Plan (As Proposed to be Amended).......................................... III-1
Annex IV -- Annual Performance Based Bonus Plan (As Proposed to be Amended).......................................... IV-1
Annex V -- Circuit City Stores, Inc. and Subsidiaries -- Index to Financial Information.............................. V-1
Annex VI -- Circuit City Group
Description of Business............................................................................................ VI-1
Index to Financial Information..................................................................................... VI-4
Annex VII -- CarMax Group
Description of Business............................................................................................ VII-1
Index to Financial Information..................................................................................... VII-16
</TABLE>
ii
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE PROXY
TERM STATEMENT
- ---- ---------------
<S> <C>
Acquiring Person.............................................................................................. 46
Affiliated Transactions....................................................................................... 48
Articles...................................................................................................... 1
Bonus Plan.................................................................................................... 56
CarMax........................................................................................................ VII-1
CarMax Group.................................................................................................. 1
CarMax Group Available Dividend Amount........................................................................ 32
CarMax Group Net Earnings (Loss).............................................................................. 32
CarMax Group Subsidiaries..................................................................................... 36
CarMax Right.................................................................................................. 46
CarMax Stock.................................................................................................. 1
CarMax Stock Offering......................................................................................... 1
CarMax Stock Proposal......................................................................................... 1
CarMax Stock Proposal Amendments.............................................................................. 1
Circuit City Group............................................................................................ 1
Circuit City Group Available Dividend Amount.................................................................. 32
Circuit City Group Net Earnings (Loss)........................................................................ 32
Circuit City Group Subsidiaries............................................................................... 36
Circuit City Right............................................................................................ 46
Circuit City Stock............................................................................................ 1
Code.......................................................................................................... 44
Committee..................................................................................................... 53
Common Stock.................................................................................................. 31
Common Stock Authorization.................................................................................... 11
Common Stock Redesignation.................................................................................... 11
Company....................................................................................................... 1
Control Share Acquisition..................................................................................... 49
Convertible Securities........................................................................................ II-A-15
Deferral Account.............................................................................................. 60
Disinterested Director........................................................................................ 48
Disposition................................................................................................... 33
Distribution Date............................................................................................. 46
Exchange Act.................................................................................................. 40
Existing Common Stock......................................................................................... 1
Expiration Date............................................................................................... 46
Fair Value.................................................................................................... II-A-15
Group......................................................................................................... 1
Inter-Group Interest.......................................................................................... 4
Inter-Group Interest Fraction................................................................................. 12
Interested Shareholder........................................................................................ 48
Liquidation Unit.............................................................................................. 2
Market Capitalization......................................................................................... II-A-16
Market Value.................................................................................................. II-A-16
Market Value Ratio of the CarMax Stock to the Circuit City Stock.............................................. II-A-16
Market Value Ratio of the Circuit City Stock to the CarMax Stock.............................................. II-A-17
Net Proceeds.................................................................................................. 35
Number of Shares Issuable with Respect to the Inter-Group Interest............................................ 12
NYSE.......................................................................................................... 2
Original Rights............................................................................................... 46
Outstanding CarMax Fraction................................................................................... 12
Ownership Trigger Date........................................................................................ 46
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE PROXY
TERM STATEMENT
- ---- ---------------
1989 Plan..................................................................................................... 60
<S> <C>
1994 Plan..................................................................................................... 52
Pension Plan.................................................................................................. 59
Performance Criteria.......................................................................................... 56
Plan Year..................................................................................................... 56
Principal Economic Terms...................................................................................... 47
Publicly Traded............................................................................................... II-A-18
Redemption Price.............................................................................................. 47
Related Business Transaction.................................................................................. 35
Restated Rights Agreement..................................................................................... 46
Rights........................................................................................................ 46
Rights Agreement.............................................................................................. 46
SARs.......................................................................................................... 58
Series E Preferred Stock...................................................................................... 31
Series F Preferred Stock...................................................................................... 46
Series E Purchase Price....................................................................................... 46
Series F Purchase Price....................................................................................... 46
Special Meeting............................................................................................... 1
Supplement.................................................................................................... 1
Trading Day................................................................................................... II-A-18
VSCA.......................................................................................................... 2
</TABLE>
iv
<PAGE>
CIRCUIT CITY STORES, INC.
9950 Mayland Drive
Richmond, Virginia 23233
(804) 527-4000
-------------------------
PROXY STATEMENT
-------------------------
SPECIAL MEETING OF SHAREHOLDERS
This Proxy Statement, mailed to shareholders on or about December 24, 1996,
is furnished in connection with the solicitation by Circuit City Stores, Inc.
(the "Company") of proxies in the accompanying form from holders of outstanding
shares of the Company's common stock, par value $.50 per share (the "Existing
Common Stock"), for use at a Special Meeting of Shareholders to be held at 8:00
a.m., Eastern Time, on January 24, 1997 at the offices of McGuire, Woods, Battle
& Boothe, L.L.P., One James Center, 901 East Cary Street, Richmond, Virginia,
and at any adjournments thereof (the "Special Meeting"). For an index indicating
the pages on which certain terms used in this Proxy Statement are defined, see
"Glossary of Defined Terms" located immediately following the Table of Contents
of this Proxy Statement.
At the Special Meeting, holders of the Existing Common Stock will be asked
to consider and approve a proposal (the "CarMax Stock Proposal") to authorize
certain amendments as set forth in Annex II-A (the "CarMax Stock Proposal
Amendments") to the Company's Amended and Restated Articles of Incorporation
(the "Articles"), in order to effect a comprehensive plan that will result in a
restructuring of the Existing Common Stock into two new series of Common Stock
intended to reflect separately the performance of the Company's two main
businesses -- its consumer electronics and appliances retail business, including
the Circuit City Group's interest in the CarMax Group (the "Circuit City
Group"), and its used- and new-car retail business (the "CarMax Group"), without
diminishing the benefits of remaining a single company. The Circuit City Group
and CarMax Group are sometimes referred to herein collectively as the "Groups"
and individually as a "Group."
The key elements of this plan are as follows:
(Bullet) A new series of Common Stock to be called Circuit City Stores,
Inc. -- CarMax Group Common Stock, par value $.50 per share
("CarMax Stock"), which is intended to reflect separately the
performance of the CarMax Group, would be created. Subject to
approval by the Company's shareholders of the CarMax Stock
Proposal and prevailing market conditions, the Company currently
plans to offer to the public for cash shares of CarMax Stock which
would initially represent 15% to 20% of the equity value of the
CarMax Group (the "CarMax Stock Offering"). The net proceeds of
the CarMax Stock Offering would be used to finance part of the
Company's expansion plans for the CarMax Group and to repay the
CarMax Group's allocated portion of Company indebtedness. Upon
completion of the CarMax Stock Offering, the Circuit City Group
would hold the balance of the equity value of the CarMax Group.
(Bullet) Each share of the Existing Common Stock would be redesignated as
one share of a new series of Common Stock to be called Circuit
City Stores, Inc. -- Circuit City Group Common Stock, par value
$.50 per share ("Circuit City Stock"), which is intended to
reflect separately the performance of the Circuit City Group,
including the Circuit City Group's interest in the CarMax Group.
Prior to the Special Meeting, the Company intends to distribute to all
shareholders a supplement (the "Supplement") to these proxy materials setting
forth certain additional information regarding the CarMax Stock Offering,
including the number of shares anticipated to be sold, the anticipated range of
prices at which the shares would be sold and the amount of net proceeds expected
to be raised.
The Board of Directors currently intends to pay dividends on the Circuit
City Stock at a quarterly rate of 3.5(cents) per share, which is equal to the
current quarterly dividend rate on the Existing Common Stock. With regard to the
CarMax Stock, the Board of Directors currently intends to retain future
earnings, if any, for the development of the business of the CarMax Group and
does not currently anticipate paying dividends on the CarMax Stock in the
foreseeable future. Dividends will be payable when, as and if declared by the
Board of Directors (i) on the Circuit City Stock out of the lesser of assets of
the Company legally available therefor and the Circuit City Group Available
Dividend Amount and (ii) on the CarMax Stock out of the lesser of assets of the
Company legally available therefor and the CarMax Group Available Dividend
Amount. The applicable Available Dividend Amount is intended to be similar, on a
per share basis, to the amount of assets that would be available for the payment
of dividends under Virginia law if the applicable Group were a separate company.
1
<PAGE>
The Company may convert at any time each share of one series of Common
Stock into a number of shares of the other series equal to 115% of the ratio of
the average market value of the shares of the series being converted to the
average market value of the other series of Common Stock, calculated on a
time-weighted basis. In the event of a disposition by the Company of all or
substantially all of the properties and assets of a Group, the Company will,
subject to certain conditions, be required to (i) subject to the limitations on
dividends described above, pay a dividend on the series of Common Stock relating
to such Group, (ii) to the extent of legally available assets redeem shares of
such series of Common Stock, in the case of any such dividend or redemption, in
an amount equal to the proportionate interest of the holders of such series in
the Fair Value of the Net Proceeds of such disposition, or (iii) convert each
outstanding share of such series of Common Stock into a number of shares of the
series of Common Stock relating to the other Group equal to 110% of the ratio of
the average market value of the shares of the series being converted to the
average market value of the other series of Common Stock. If all of the assets
and liabilities attributed to a Group are held by one or more wholly owned
subsidiaries of the Company, the Company may redeem the shares of the series of
Common Stock relating to such Group for shares of such subsidiaries. The
relative voting power of shares of Circuit City Stock and CarMax Stock will
fluctuate from time to time, with each share of Circuit City Stock having one
vote and each share of CarMax Stock having a variable vote, based upon the
time-weighted relative market values of one share of Circuit City Stock and one
share of CarMax Stock. The rights of the holders of Circuit City Stock and
CarMax Stock upon a liquidation, dissolution or termination of the Company will
be in proportion to the respective per share liquidation units of such series
(each, a "Liquidation Unit"). Each share of Circuit City Stock will have one
Liquidation Unit and each share of CarMax Stock will have .5 of a Liquidation
Unit. The Liquidation Units of Circuit City Stock and CarMax Stock were
determined by the Company and are based upon, among other factors, each Group's
initial level of debt and equity capitalization, each Group's recent historical
financial performance, the market prices of shares of comparable companies that
are publicly traded and the current state of the markets for public offerings
and other stock transactions. These features, as well as other special
considerations, are discussed under "Risk Factors" and "Proposal 1 -- The CarMax
Stock Proposal -- Description of Circuit City Stock and CarMax Stock."
Holders of Circuit City Stock and CarMax Stock will be shareholders of the
Company and will be subject to the risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Financial effects
that arise from either Group and affect the Company's results of operations or
financial condition could, if significant, affect the results of operations or
financial condition of the other Group or the market price of the series of
Common Stock relating to the other Group and reduce the assets of the Company
legally available for payment of future dividends on such other series of Common
Stock. When evaluating the CarMax Stock Proposal, shareholders of the Company
should be aware of certain risk factors relating thereto. See "Risk Factors."
The Existing Common Stock is traded on the New York Stock Exchange, Inc.
(the "NYSE"); however, there has been no prior market for Circuit City Stock or
CarMax Stock. The NYSE has approved, subject to official notice of issuance, the
redesignation of the Existing Common Stock as Circuit City Stock and the listing
of the CarMax Stock. See "Proposal 1 -- The CarMax Stock Proposal -- Stock
Exchange Listings."
Shareholders also will be asked to consider and approve three related
proposals that would (i) amend the Company's Articles to increase the number of
shares of Common Stock authorized for issuance from 250,000,000 to 350,000,000
in order to provide greater assurance that a sufficient number of shares would
be available in the event of a conversion of one series of Common Stock into the
other series ("Proposal 2"); (ii) amend the Company's 1994 Stock Incentive Plan
to authorize the granting of stock awards in either Circuit City Stock or CarMax
Stock, or both, to reserve shares of CarMax Stock for issuance pursuant to
awards made under such plan and to permit the conversion of certain existing
options into options to acquire shares of CarMax Stock ("Proposal 4"); and (iii)
amend the Company's Annual Performance Based Bonus Plan to permit awards under
such plan to be based on designated criteria related to the performance of each
Group ("Proposal 5"). Finally, shareholders will also be asked to consider and
approve an unrelated proposal ("Proposal 3") that would amend the Company's
Articles (i) to conform certain provisions thereof to the current provisions of
the Virginia Stock Corporation Act (the "VSCA") and (ii) to delete certain
provisions thereof that have expired (the "Additional Amendments").
If the CarMax Stock Proposal is approved by the shareholders, the Company,
prior to the delivery of the shares of CarMax Stock sold in the CarMax Stock
Offering, will file with the Virginia State Corporation Commission Articles of
Amendment to effect the CarMax Stock Proposal Amendments. At any time prior to
such filing with the Virginia State Corporation Commission, including after
adoption of the CarMax Stock Proposal by the Company's shareholders, the Board
of Directors may abandon the CarMax Stock Proposal without further action by the
shareholders. Proposals 2, 4 and 5 will not be implemented unless the CarMax
Stock Proposal is approved by shareholders and implemented by the Board of
Directors.
2
<PAGE>
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF THE CARMAX STOCK PROPOSAL,
INCLUDING THE CARMAX STOCK PROPOSAL AMENDMENTS WHICH CONSTITUTE A PART THEREOF,
AND PROPOSALS 2 THROUGH 5 IS IN THE BEST INTERESTS OF THE COMPANY AND ITS
SHAREHOLDERS AND, ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE FOR EACH OF THE PROPOSALS.
Shareholders should note that, if the CarMax Stock Proposal is approved and
the Existing Common Stock is redesignated as Circuit City Stock, holders will
not have to send in their certificates representing shares of Existing Common
Stock to be exchanged for certificates representing shares of Circuit City
Stock. DO NOT MAIL YOUR EXISTING COMMON STOCK CERTIFICATES TO EITHER THE COMPANY
OR ITS TRANSFER AGENT IN CONNECTION WITH THESE TRANSACTIONS.
3
<PAGE>
SUMMARY COMPARISON OF TERMS OF
EXISTING COMMON STOCK WITH TERMS OF
CIRCUIT CITY STOCK AND CARMAX STOCK
THE FOLLOWING IS A COMPARISON OF THE EXISTING COMMON STOCK AND THE PROPOSED
CIRCUIT CITY STOCK AND CARMAX STOCK. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY THE MORE DETAILED INFORMATION CONTAINED IN THIS PROXY STATEMENT AND THE
ANNEXES HERETO. SEE "PROXY STATEMENT SUMMARY," "RISK FACTORS," "PROPOSAL
1 -- THE CARMAX STOCK PROPOSAL -- CERTAIN MANAGEMENT AND ALLOCATION POLICIES"
AND " -- DESCRIPTION OF CIRCUIT CITY STOCK AND CARMAX STOCK." UNLESS OTHERWISE
DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE RESPECTIVE
MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROXY STATEMENT. SEE "GLOSSARY OF
DEFINED TERMS" LOCATED IMMEDIATELY FOLLOWING THE TABLE OF CONTENTS OF THIS PROXY
STATEMENT. SHAREHOLDERS ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT AND THE
ANNEXES HERETO IN THEIR ENTIRETY.
<TABLE>
<CAPTION>
THE CARMAX STOCK PROPOSAL
EXISTING COMMON --------------------------------------------------------------------------------
STOCK CIRCUIT CITY STOCK CARMAX STOCK
-------------------- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
BUSINESS: All businesses of The Circuit City Group is generally The CarMax Group is generally comprised
the Company. comprised of (i) the Company's consumer of the Company's used- and new-car
electronics and appliances retail retail business, including its related
business, (ii) an interest in the vehicle financing operations.
CarMax Group (the "Inter-Group
Interest"), which excludes the interest
represented by any outstanding shares
of CarMax Stock, and (iii) all other
businesses in which the Company or any
of its subsidiaries may be engaged
(other than those comprising the CarMax
Group).
ISSUANCE: -- Prior to the delivery of the CarMax Subject to approval by the shareholders
Stock in the CarMax Stock Offering, of the CarMax Stock Proposal and to
each outstanding share of Existing prevailing market conditions, the
Common Stock will be redesignated as Company currently plans to offer to the
one share of Circuit City Stock. public for cash in the CarMax Stock
Offering shares of CarMax Stock which
will initially represent 15% to 20% of
the equity value of the CarMax Group.
The Company plans to use the net
proceeds of the CarMax Stock Offering
to finance part of its expansion plans
for the CarMax Group and to repay the
CarMax Group's allocated portion of
Company indebtedness. Immediately after
the consummation of the CarMax Stock
Offering, the Circuit City Group will
hold the balance of the equity value of
the CarMax Group. The Company retains
the ability to offer a greater or
lesser percentage of the equity value
of the CarMax Group depending on market
conditions and other circumstances that
may exist at the time of the CarMax
Stock Offering.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
THE CARMAX STOCK PROPOSAL
EXISTING COMMON --------------------------------------------------------------------------------
STOCK CIRCUIT CITY STOCK CARMAX STOCK
-------------------- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
LISTING: NYSE under the The NYSE has approved, subject to The NYSE has approved, subject to
symbol "CC." official notice of issuance, the official notice of issuance, the
redesignation of the Existing Common listing of the CarMax Stock under the
Stock as Circuit City Stock, which will symbol "KMX."
continue to trade under the symbol
"CC."
DIVIDENDS: The Company's The Company currently intends to pay The Company currently does not intend
quarterly dividend dividends on the Circuit City Stock at to pay dividends on the CarMax Stock.
rate is currently an initial quarterly rate of 3.5(cents)
3.5(cents) per share per share, which is equal to the
of Existing Common quarterly dividend rate on the
Stock. Dividends are Company's Existing Common Stock.
payable out of all
assets of the
Company legally
available for
dividends.
Dividends on the Dividends on the Circuit City Stock Dividends on the CarMax Stock will be
Existing Common will be paid at the discretion of the paid at the discretion of the Board of
Stock are limited to Board of Directors based primarily upon Directors based primarily upon the
legally available the financial condition, results of financial condition, results of
assets under operations and business requirements of operations and business requirements of
Virginia law and are the Circuit City Group and the Company the CarMax Group and the Company as a
payable at the as a whole. The Board of Directors whole. Dividends will be payable out of
discretion of the believes that implementation of the the lesser of (i) the assets of the
Board of Directors CarMax Stock Proposal would not Company legally available for the
based primarily upon adversely affect the Company's ability payment of dividends and (ii) the
the financial to pay dividends on the Circuit City CarMax Group Available Dividend Amount.
condition, results Stock. Dividends will be payable out of
of operations and the lesser of (i) the assets of the
business Company legally available for the
requirements of the payment of dividends and (ii) the
Company. Circuit City Group Available Dividend
Amount.
The Circuit City Group Available The CarMax Group Available Dividend
Dividend Amount is intended to be Amount is intended to be similar to the
similar to the amount of assets that amount of assets that would be
would be available for payment of available for payment of dividends on
dividends on the Circuit City Stock the CarMax Stock under the VSCA if the
under the VSCA if the Circuit City CarMax Group were a separate company.
Group were a separate company.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THE CARMAX STOCK PROPOSAL
EXISTING COMMON --------------------------------------------------------------------------------
STOCK CIRCUIT CITY STOCK CARMAX STOCK
-------------------- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
The Board of Directors, subject to the The Board of Directors, subject to the
limitations set forth above, may, in limitations set forth above, may, in
its sole discretion, declare and pay its sole discretion, declare and pay
dividends exclusively on the Circuit dividends exclusively on the CarMax
City Stock, exclusively on the CarMax Stock, exclusively on the Circuit City
Stock or on both such series of Common Stock or on both such series of Common
Stock, in equal or unequal amounts, Stock, in equal or unequal amounts,
notwithstanding the relative amounts of notwithstanding the relative amounts of
the Circuit City Group Available the CarMax Group Available Dividend
Dividend Amount and the CarMax Group Amount and the Circuit City Group
Available Dividend Amount, the amount Available Dividend Amount, the amount
of prior dividends declared on each of prior dividends declared on each
series, the respective voting or series, the respective voting or
liquidation rights of each series or liquidation rights of each series or
any other factor. any other factor.
VOTING RIGHTS: One vote per share. Except as otherwise described herein, Except as otherwise described herein,
the holders of Circuit City Stock and the holders of CarMax Stock and Circuit
CarMax Stock will vote together as a City Stock will vote together as a
single voting group. The Circuit City single voting group. Each share of
Stock will have one vote per share. CarMax Stock will have a variable vote
equal to the ratio of the time-weighted
average Market Value of one share of
CarMax Stock to the time-weighted
average Market Value of one share of
Circuit City Stock, calculated over the
20-Trading Day period ending 10 Trading
Days prior to the record date, and may
have more than, less than or exactly
one vote per share.
Because each share of CarMax Stock will Because each share of CarMax Stock will
have a variable number of votes based have a variable number of votes, the
upon a ratio of the time-weighted relative voting power per share of
average Market Value of one share of CarMax Stock and Circuit City Stock
CarMax Stock to the time-weighted will fluctuate.
average Market Value of one share of
Circuit City Stock, the relative voting
power per share of Circuit City Stock
and CarMax Stock will fluctuate.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THE CARMAX STOCK PROPOSAL
EXISTING COMMON --------------------------------------------------------------------------------
STOCK CIRCUIT CITY STOCK CARMAX STOCK
-------------------- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
RIGHTS ON None. If the Company disposes of all or If the Company disposes of all or
DISPOSITION: substantially all of the properties and substantially all of the properties and
assets attributed to the Circuit City assets attributed to the CarMax Group
Group (I.E., 80% or more on a current (I.E., 80% or more on a current market
market value basis), other than in a value basis), other than in a
transaction in which the Company transaction in which the Company
receives primarily equity securities of receives primarily equity securities of
an entity engaged or proposing to an entity engaged or proposing to
engage primarily in a business similar engage primarily in a business similar
or complementary to the business of the or complementary to the business of the
Circuit City Group, the Company must CarMax Group, the Company must either
either (i) distribute to holders of (i) distribute to holders of CarMax
Circuit City Stock an amount in cash Stock an amount in cash and/or
and/or securities or other property securities or other property equal to
equal to the Fair Value of the Net their proportionate interest in the
Proceeds of such disposition, either by Fair Value of the Net Proceeds of such
special dividend or by redemption of disposition, either by special dividend
all or part of the outstanding shares or by redemption of all or part of the
of Circuit City Stock, or (ii) convert outstanding shares of CarMax Stock, or
each share of Circuit City Stock into a (ii) convert each share of CarMax Stock
number of shares of CarMax Stock equal into a number of shares of Circuit City
to 110% of the ratio of the average Stock equal to 110% of the ratio of the
Market Value of one share of Circuit average Market Value of one share of
City Stock to the average Market Value CarMax Stock to the average Market
of one share of CarMax Stock, Value of one share of Circuit City
calculated over the 10-Trading Day Stock, calculated over the 10-Trading
period beginning on the 16th Trading Day period beginning on the 16th
Day after consummation of the Trading Day after consummation of the
disposition transaction. disposition transaction.
The Company may, at any time prior to The Company may, at any time prior to
the first anniversary of a dividend on, the first anniversary of a dividend on,
or partial redemption of, shares of or partial redemption of, shares of
Circuit City Stock following a CarMax Stock following a disposition of
disposition of all or substantially all all or substantially all of the
of the properties and assets attributed properties and assets attributed to the
to the Circuit City Group, convert each CarMax Group, convert each remaining
remaining outstanding share of Circuit outstanding share of CarMax Stock into
City Stock into a number of shares of a number of shares of Circuit City
CarMax Stock equal to 110% of the ratio Stock equal to 110% of the ratio of the
of the time-weighted average Market time- weighted average Market Value of
Value of one share of Circuit City one share of CarMax Stock to the
Stock to the time-weighted average time-weighted average Market Value of
Market Value of one share of CarMax one share of Circuit City Stock,
Stock, calculated over the 20-Trading calculated over the 20-Trading Day
Day period ending five Trading Days period ending five Trading Days prior
prior to the date of the notice of such to the date of the notice of such
conversion. conversion.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THE CARMAX STOCK PROPOSAL
EXISTING COMMON --------------------------------------------------------------------------------
STOCK CIRCUIT CITY STOCK CARMAX STOCK
-------------------- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
SALES OF LESS THAN -- The proceeds from any disposition of The proceeds from any disposition of
SUBSTANTIALLY ALL OF assets that do not comprise all or assets that do not comprise all or
THE ASSETS OF A substantially all of the properties and substantially all of the properties and
GROUP: assets attributed to the Circuit City assets attributed to the CarMax Group
Group will be assets attributed to the will be assets attributed to the CarMax
Circuit City Group and used for its Group and used for its benefit, subject
benefit, subject to the policies to the policies described under
described under "Proposal 1 -- The "Proposal 1 -- The CarMax Stock
CarMax Stock Proposal -- Certain Proposal -- Certain Management and
Management and Allocation Policies." Allocation Policies."
CONVERSION AT OPTION None. The Company may, at any time, convert The Company may, at any time, convert
OF COMPANY: each share of Circuit City Stock into a each share of CarMax Stock into a
number of shares of CarMax Stock equal number of shares of Circuit City Stock
to 115% of the ratio of the equal to 115% of the ratio of the
time-weighted average Market Value of time-weighted average Market Value of
one share of Circuit City Stock to the one share of CarMax Stock to the
time-weighted average Market Value of time-weighted average Market Value of
one share of CarMax Stock, calculated one share of Circuit City Stock,
over the 20-Trading Day period ending calculated over the 20-Trading Day
five Trading Days prior to the date of period ending five Trading Days prior
notice of such conversion. to the date of notice of such
conversion.
The ratio of the Market Value of one The ratio of the Market Value of one
share of Circuit City Stock to one share of CarMax Stock to one share of
share of CarMax Stock could be Circuit City Stock could be influenced
influenced by many factors, including by many factors, including the results
the results of operations of the of operations of the Company and each
Company and each of the Groups, trading of the Groups, trading volume, share
volume, share issuances and repurchases issuances and repurchases and general
and general economic and market economic and market conditions.
conditions.
REDEMPTION IN None. The Company may redeem the Circuit City The Company may redeem the CarMax Stock
EXCHANGE FOR STOCK Stock for all of the shares of the for a number of shares of one or more
OF SUBSIDIARY: common stock of one or more wholly wholly owned subsidiaries of the
owned subsidiaries of the Company that Company that hold all of the assets and
hold all of the assets and liabilities liabilities attributed to the CarMax
attributed to the Circuit City Group. Group equal to the proportionate
If at the time of any such redemption interest in the CarMax Group
the Circuit City Group holds an represented by the outstanding CarMax
Inter-Group Interest in the CarMax Stock.
Group, the Company also will issue
shares of CarMax Stock in respect of
the Inter-Group Interest either to the
holders of the Circuit City Stock or to
one or more of such subsidiaries.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THE CARMAX STOCK PROPOSAL
EXISTING COMMON --------------------------------------------------------------------------------
STOCK CIRCUIT CITY STOCK CARMAX STOCK
-------------------- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
LIQUIDATION: Holders of Existing Holders of Circuit City Stock will be Holders of CarMax Stock will be
Common Stock are entitled to a portion of the assets entitled to a portion of the assets
entitled to receive remaining for distribution to holders remaining for distribution to holders
the net assets of of Common Stock on a per share basis in of Common Stock on a per share basis in
the Company, if any, proportion to the Liquidation Units per proportion to the Liquidation Units per
remaining for share of Circuit City Stock. Each share share of CarMax Stock. Each share of
distribution to of Circuit City Stock will have one CarMax Stock will have .5 of a
holders of Existing Liquidation Unit, subject to adjustment Liquidation Unit, subject to adjustment
Common Stock. if shares of either series are if shares of either series are
subdivided, combined or distributed as subdivided, combined or distributed as
a dividend. a dividend.
CERTAIN MANAGEMENT -- The Company intends to follow certain The Company intends to follow certain
AND ALLOCATION policies with respect to the allocation policies with respect to the allocation
POLICIES: to the Groups of principal corporate to the Groups of principal corporate
activities, including (i) the activities, including (i) the
centralized management of most centralized management of most
financial activities, including the financial activities, including the
investment of surplus cash, the investment of surplus cash, the
issuance and repayment of short-term issuance and repayment of short-term
and long-term debt and the issuance and and long-term debt and the issuance and
repurchase of any Preferred Stock, (ii) repurchase of any Preferred Stock, (ii)
the allocation of Company indebtedness the allocation of Company indebtedness
or, if issued, Preferred Stock either or, if issued, Preferred Stock either
between the Groups or in its entirety between the Groups or in its entirety
to one Group, (iii) the accounting for to one Group, (iii) the accounting for
transfers of cash or other property transfers of cash or other property
from one Group to the other Group, (iv) from one Group to the other Group, (iv)
the financial impacts of issuances of the financial impacts of issuances of
additional shares of Circuit City Stock additional shares of CarMax Stock or
or CarMax Stock, (v) the allocation of Circuit City Stock, (v) the allocation
corporate general and administrative of corporate general and administrative
costs, and (vi) the allocation of costs, and (vi) the allocation of
federal income taxes and tax benefits. federal income taxes and tax benefits.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THE CARMAX STOCK PROPOSAL
EXISTING COMMON --------------------------------------------------------------------------------
STOCK CIRCUIT CITY STOCK CARMAX STOCK
-------------------- --------------------------------------- ---------------------------------------
<S> <C> <C> <C>
SHAREHOLDERS OF ONE -- Holders of Circuit City Stock will Holders of CarMax Stock will continue
COMPANY: continue to be subject to the risks to be subject to the risks associated
associated with an investment in the with an investment in the Company and
Company and all of its businesses, all of its businesses, assets and
assets and liabilities. Financial liabilities. Financial effects arising
effects arising from the CarMax Group from the Circuit City Group that affect
that affect the Company's results of the Company's results of operations or
operations or financial condition financial condition could, if
could, if significant, affect the significant, affect the results of
results of operations or financial operations or financial position of the
position of the Circuit City Group or CarMax Group or the market price of the
the market price of the Circuit City CarMax Stock.
Stock.
Any net losses of the Circuit City Any net losses of the CarMax Group or
Group or the CarMax Group, and the Circuit City Group, and dividends
dividends or distributions on, or or distributions on, or repurchases of,
repurchases of, Circuit City Stock, CarMax Stock, Circuit City Stock or any
CarMax Stock or any Preferred Stock, Preferred Stock, will reduce the assets
will reduce the assets of the Company of the Company legally available for
legally available for payment of future payment of future dividends on the
dividends on the Circuit City Stock and CarMax Stock and the Circuit City
the CarMax Stock. Stock.
</TABLE>
10
<PAGE>
PROXY STATEMENT SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS PROXY STATEMENT SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
PROXY STATEMENT AND THE ANNEXES HERETO. AS USED HEREIN, "COMPANY" MEANS THE
COMPANY AND ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE
REQUIRES. UNLESS OTHERWISE INDICATED, REFERENCES HEREIN ARE TO FISCAL YEARS AND
QUARTERS OF THE COMPANY. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED
IN THIS PROXY STATEMENT SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM
ELSEWHERE IN THIS PROXY STATEMENT. SEE "GLOSSARY OF DEFINED TERMS" LOCATED
IMMEDIATELY FOLLOWING THE TABLE OF CONTENTS OF THIS PROXY STATEMENT.
SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE ANNEXES HERETO IN
THEIR ENTIRETY.
SPECIAL MEETING
This Proxy Statement and enclosed form of proxy are being furnished in
connection with the solicitation of proxies by the Board of Directors in the
enclosed form for use at the Special Meeting to be held on Friday, January 24,
1997, at 8:00 a.m., Eastern Time, at the offices of McGuire, Woods, Battle &
Boothe, L.L.P., One James Center, 901 East Cary Street, Richmond, Virginia. Only
holders of record of Existing Common Stock, as of the close of business on
December 11, 1996, are entitled to notice of, to attend and to vote at the
Special Meeting. The Special Meeting will be held to consider the CarMax Stock
Proposal and Proposals 2 through 5.
The affirmative vote of the holders of a majority of the outstanding shares
of Existing Common Stock will be required to approve (i) the CarMax Stock
Proposal Amendments to permit implementation of the CarMax Stock Proposal, (ii)
the amendment to the Articles reflected in Proposal 2 and (iii) the Additional
Amendments reflected in Proposal 3. The amendments to the 1994 Stock Incentive
Plan (Proposal 4) and the amendments to the Annual Performance Based Bonus Plan
(Proposal 5) will be approved if the votes cast in favor of the proposal exceed
the votes cast opposing the proposal.
THE CARMAX STOCK PROPOSAL
GENERAL
The shareholders of the Company are being asked to consider and approve the
CarMax Stock Proposal, which, if approved, would authorize the CarMax Stock
Proposal Amendments to the Articles set forth in Annex II-A hereto. Such
amendments would, among other things:
(i) provide for the issuance of the Company's Common Stock in series
by action of the Board of Directors (the "Common Stock Authorization"), of
which 125,000,000 shares would initially be designated by the Board of
Directors as Circuit City Stock and 125,000,000 shares would initially be
designated as CarMax Stock, with the preferences, limitations and relative
rights thereof set forth in the CarMax Stock Proposal Amendments and
described herein, and
(ii) redesignate each outstanding share of Existing Common Stock as
one share of Circuit City Stock (the "Common Stock Redesignation").
Subject to approval by the Company's shareholders of the CarMax Stock
Proposal and prevailing market conditions, the Company currently plans to offer
to the public for cash in the CarMax Stock Offering shares of CarMax Stock which
would initially represent 15% to 20% of the equity value of the CarMax Group.
The Company plans to use the net proceeds of the CarMax Stock Offering to
finance part of its expansion plans for the CarMax Group and to repay the CarMax
Group's allocated portion of Company indebtedness. The Circuit City Group will
initially hold the balance of the equity value of the CarMax Group. The Company
retains the ability to offer a greater or lesser percentage of the equity value
of the CarMax Group depending on market conditions and other circumstances that
may exist at the time of the CarMax Stock Offering.
Prior to the Special Meeting, the Company intends to distribute to all
shareholders entitled to vote at the meeting the Supplement setting forth
certain additional information regarding the CarMax Stock Offering, including
the number of shares anticipated to be sold, the anticipated range of prices at
which the shares would be sold and the amount of net proceeds expected to be
raised.
The shares of CarMax Stock that the Company currently expects to issue in
the CarMax Stock Offering will be issued for the account of the CarMax Group and
the net proceeds thereof will be allocated to the CarMax Group. If shares
representing more than 20% of the equity value of the CarMax Group are sold in
the CarMax Stock Offering, the Company will identify the number, if any, of such
additional shares issued for the account of the Circuit City Group and the
number, if any,
11
<PAGE>
of such additional shares issued for the account of the CarMax Group. The net
proceeds of any such additional shares would be allocated to the Circuit City
Group, if such shares are issued for the account of the Circuit City Group, or
allocated to the CarMax Group, if such shares are issued for the account of the
CarMax Group.
IF THE CARMAX STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS OR THE
CARMAX STOCK OFFERING IS NOT CONSUMMATED, THE EXISTING COMMON STOCK WILL NOT BE
REDESIGNATED AS CIRCUIT CITY STOCK AND THE CARMAX STOCK WILL NOT BE ISSUED.
The authorized but unissued shares of Common Stock, including Circuit City
Stock and CarMax Stock, would be available for issuance by the Company, from
time to time, as determined by the Board of Directors, for any proper corporate
purpose, which could include raising capital, paying stock dividends, providing
compensation or benefits to employees or acquiring other companies or
businesses. The approval of the shareholders of the Company will not be
solicited by the Company for the issuance from the authorized but unissued
shares of Common Stock of additional shares of Circuit City Stock or CarMax
Stock (including from shares that were previously designated as part of the
other series but are unissued) unless such approval is deemed advisable by the
Board of Directors or is required by stock exchange regulations or under the
VSCA.
RISK FACTORS
When evaluating the CarMax Stock Proposal, shareholders should be aware of
certain risk factors relating thereto. Such risk factors include: (i) the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities; (ii) limited separate shareholder rights with respect to the
two series of Common Stock; (iii) the lack of legal precedent with respect to
the fiduciary duties of the board of directors of a company with two series of
common stock, the rights of which are defined by reference to specified
businesses of the company; (iv) the potential diverging interests of two series
of common stock; (v) the ability of the Board of Directors to change certain
management and allocation policies without shareholder approval; (vi) the
ability to transfer funds between the Groups; (vii) the effect of allocating
financing costs between the Groups; (viii) the potential effects of a possible
disposition of assets attributed to a Group; (ix) the Company's ability to issue
authorized but unissued shares of Circuit City Stock or CarMax Stock without
shareholder approval; (x) limitations on potential unsolicited acquisitions of
either Group; and (xi) no assurances as to the market price of the Circuit City
Stock or the CarMax Stock following the CarMax Stock Offering. For additional
information with respect to the foregoing considerations, see "Risk Factors."
INTER-GROUP INTEREST OF CIRCUIT CITY GROUP IN CARMAX GROUP; OUTSTANDING CARMAX
FRACTION
The "Outstanding CarMax Fraction" means the percentage interest in the
CarMax Group represented at any time by the outstanding shares of CarMax Stock,
and the "Inter-Group Interest Fraction" means the remaining percentage interest
in the CarMax Group that is attributed to the Circuit City Group. The sum of the
Inter-Group Interest Fraction and the Outstanding CarMax Fraction will always
equal 100%. The "Number of Shares Issuable with Respect to the Inter-Group
Interest" means the number of shares of CarMax Stock that could be sold or
otherwise issued by the Company for the account of the Circuit City Group in
respect of the Inter-Group Interest. The Inter-Group Interest would not be
represented by actual shares of CarMax Stock and could not be voted by the
Circuit City Group.
The shares of CarMax Stock that the Company expects to issue in the CarMax
Stock Offering will be issued for the account of the CarMax Group. As a result,
immediately after the CarMax Stock Offering, the Outstanding CarMax Fraction is
expected to equal 15% to 20% and the Inter-Group Interest Fraction is expected
to equal 80% to 85%. If shares representing a greater percentage of the equity
value of the CarMax Group are sold in the CarMax Stock Offering, the Company
will identify the number of such additional shares that is issued for the
account of the Circuit City Group and the number of such additional shares that
is issued for the account of the CarMax Group. In each case, the Outstanding
CarMax Fraction would increase and the Inter-Group Interest Fraction would
decrease accordingly. The Number of Shares Issuable with Respect to the
Inter-Group Interest would be reduced as a result of the issuance of any such
additional shares for the account of the Circuit City Group and would be
unchanged as a result of the issuance of any such additional shares for the
account of the CarMax Group.
The Board of Directors has determined that 75,440,000 is the number of
shares of CarMax Stock that, if issued, would initially represent 100% of the
equity value of the CarMax Group. Such number was determined based on the
historical and projected financial and operating information of the CarMax
Group, the market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the CarMax
Group, prevailing equity market conditions and the desired range of the initial
public offering price of the CarMax Stock. The number of shares of CarMax
12
<PAGE>
Stock representing 100% of the equity value of the CarMax Group would increase
as a result of the CarMax Stock Offering to the extent of the shares issued for
the account of the CarMax Group. For example, if 20% of the equity value of the
CarMax Group were issued in the CarMax Stock Offering, the 18,860,000 shares
representing such percentage and issued to the public would cause the number of
shares representing 100% of the equity value of the CarMax Group to increase to
94,300,000.
At the time of any additional sale of CarMax Stock, the Board of Directors
would, in its sole discretion, determine the allocation of the net proceeds of
such sale between the Circuit City Group and the CarMax Group. The Board of
Directors could allocate 100% of the net proceeds of a sale of CarMax Stock to
the Circuit City Group or to the CarMax Group, in which event the net proceeds
would be reflected entirely in the financial statements of the Group to which
such proceeds would be allocated. If the net proceeds of any sale of CarMax
Stock were allocated to the Circuit City Group in respect of its Inter-Group
Interest, the Number of Shares Issuable with Respect to the Inter-Group Interest
would be reduced, the Inter-Group Interest Fraction would accordingly also be
reduced and the Outstanding Interest Fraction would be proportionately
increased. If the net proceeds of any sale of CarMax Stock were allocated to the
CarMax Group, the Number of Shares Issuable with Respect to the Inter-Group
Interest would not be reduced, but the Inter-Group Interest Fraction would
nonetheless be reduced, and the Outstanding Interest Fraction would increase
accordingly.
The Board of Directors reserves the right to issue shares of CarMax Stock
as a distribution on the Circuit City Stock, although it has no current
intention to do so. Such a distribution would be treated as a distribution of
shares issuable with respect to the Inter-Group Interest and, as a result, the
Number of Shares Issuable with Respect to the Inter-Group Interest would
decrease by the number of shares distributed to the holders of Circuit City
Stock, resulting in a reduction in the Inter-Group Interest Fraction and a
proportionate increase in the Outstanding CarMax Fraction.
Cash or other property allocated to the Circuit City Group that is
contributed as additional equity to the CarMax Group would increase the Number
of Shares Issuable with Respect to the Inter-Group Interest (based on the then
current Market Value of shares of CarMax Stock), and, accordingly, would
increase the Inter-Group Interest Fraction and decrease the Outstanding CarMax
Fraction. Cash or other property allocated to the CarMax Group that is
transferred to the Circuit City Group would, if so determined by the Board of
Directors, decrease the Number of Shares Issuable with Respect to the
Inter-Group Interest (based on the then current Market Value of shares of CarMax
Stock) and, accordingly, would decrease the Inter-Group Interest Fraction and
increase the Outstanding CarMax Fraction. The Board of Directors could
determine, in its sole discretion, to make such contribution or transfer after
consideration of a number of factors, including, among others, the financing
needs and objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
The CarMax Group cannot acquire an Inter-Group Interest in the Circuit City
Group.
For a further discussion and illustration of the calculation of the
Inter-Group Interest Fraction, the Outstanding CarMax Fraction and the Number of
Shares Issuable with Respect to the Inter-Group Interest and the effects thereon
of dividends on, and issuances and repurchases of, shares of CarMax Stock, and
transfers of cash or other property attributed to one Group to the other Group,
see "Proposal 1 -- The CarMax Stock Proposal -- Description of Circuit City
Stock and CarMax Stock -- Inter-Group Interest" and "Illustrations of Certain
Terms" in Annex I hereto.
REASONS FOR THE CARMAX STOCK PROPOSAL
The CarMax Stock Proposal was adopted by the Board of Directors following
its review of various alternatives for raising additional capital to finance the
Company's expansion plans for the CarMax Group. The Board of Directors believes
the historical price performance of the Existing Common Stock fails to reflect
adequately the value associated with the CarMax Group, thus preventing the
Company's shareholders from realizing the full value of their shares. The CarMax
Stock Proposal will permit separate market valuations of the Circuit City Group
and the CarMax Group. It will also (i) allow the Company to preserve financial,
strategic and operational benefits it currently enjoys as a single company, (ii)
provide the Company with an additional equity security that can be used to raise
capital and can be issued in connection with acquisitions and investments, (iii)
maintain flexibility that would not be available if the two Groups were separate
legal entities and (iv) provide a better framework to structure for employees of
each Group incentive plans that can be tied directly to both the business
results and the stock price performance of the Group in which they are employed.
13
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF THE CARMAX STOCK PROPOSAL
(INCLUDING THE AMENDMENTS TO THE ARTICLES THAT CONSTITUTE A PART THEREOF) IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY,
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL.
DIVIDEND POLICY
The Board of Directors currently intends to pay dividends on the Circuit
City Stock at a quarterly rate of 3.5(cents) per share, which is equal to the
quarterly dividend rate on the Company's Existing Common Stock. With regard to
the CarMax Stock, the Board of Directors currently intends to retain future
earnings, if any, for the expansion of the business of the CarMax Group and does
not anticipate paying dividends on the CarMax Stock in the foreseeable future.
While the Board of Directors does not currently intend to change the
initial quarterly dividend rates or the dividend policies referred to above, it
reserves the right to do so at any time and from time to time. Under the CarMax
Stock Proposal and Virginia law, the Board of Directors would not be required to
pay dividends in accordance with the foregoing dividend policies. For
information concerning restrictions on the assets from which dividends on the
Circuit City Stock and the CarMax Stock may be paid, see "Proposal 1 -- The
CarMax Stock Proposal -- Description of Circuit City Stock and CarMax
Stock -- Dividends."
DESCRIPTION OF CIRCUIT CITY STOCK AND CARMAX STOCK
For a summary description of the Circuit City Stock and the CarMax Stock,
see "Summary Comparison of Terms of Existing Common Stock with Terms of Circuit
City Stock and CarMax Stock." For a detailed description of the Circuit City
Stock and the CarMax Stock, see "Proposal 1 -- The CarMax Stock
Proposal -- Description of Circuit City Stock and CarMax Stock."
NO DISSENTERS' RIGHTS
Under Virginia law, holders of shares of the Existing Common Stock will not
have dissenters' rights in connection with the CarMax Stock Proposal.
TAX CONSIDERATIONS
The Company has been advised by tax counsel that no gain or loss will be
recognized by the Company on the issuance of CarMax Stock or on the Common Stock
Redesignation or by its shareholders as a result of the Common Stock
Redesignation; however, there are no court decisions bearing directly on
transactions similar to the CarMax Stock Proposal, and the Internal Revenue
Service (the "Service") has included the issuance of stock with characteristics
similar to the Circuit City Stock and CarMax Stock among the transactions upon
which it will not issue advance rulings. See "Proposal 1 -- The CarMax Stock
Proposal -- Certain Federal Income Tax Considerations."
RELATED PROPOSALS
At the Special Meeting, shareholders will also be asked to consider and
approve three related proposals that would (i) amend the Company's Articles to
increase the number of shares of Common Stock authorized for issuance from
250,000,000 to 350,000,000 in order to provide greater assurance that a
sufficient number of shares would be available in the event of a conversion of
one series of Common Stock into the other series (Proposal 2); (ii) amend the
Company's 1994 Stock Incentive Plan to authorize the granting of stock awards in
either Circuit City Stock or CarMax Stock, or both, to reserve shares of CarMax
Stock for issuance pursuant to awards made under such plan and to permit the
conversion of certain existing options into options to acquire shares of CarMax
Stock (Proposal 4); and (iii) amend the Company's Annual Performance Based Bonus
Plan to permit awards under such plan to be based on designated criteria related
to the performance of each Group (Proposal 5). Proposals 2, 4 and 5 will not be
implemented unless the CarMax Stock Proposal is approved by shareholders and
implemented by the Board of Directors.
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF PROPOSALS 2, 4 AND 5 IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY,
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSALS 2, 4 AND 5.
14
<PAGE>
ADDITIONAL AMENDMENTS TO THE ARTICLES
At the Special Meeting, shareholders will also be asked to consider and
approve the Additional Amendments (Proposal 3) which would amend the Articles
(i) to conform certain provisions thereof to the current provisions of the VSCA
and (ii) to delete certain provisions thereof that have expired.
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF PROPOSAL 3 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY, UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSAL 3.
MARKET PRICES OF COMMON STOCK
For information concerning market prices of the Existing Common Stock, see
"Common Stock Price Range."
USE OF SERVICE MARKS
The mark "Circuit City" used herein is a federally registered service mark
of the Circuit City Group and the marks "CarMax," "MaxCare," "ValuMax" and
"AutoMation" used herein are federally registered service marks of the CarMax
Group.
15
<PAGE>
THE COMPANY
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below as of August 31,
1996, and for the six months ended August 31, 1996 and 1995 were derived from
the Company's unaudited interim Consolidated Financial Statements set forth in
Annex V hereto, which include all adjustments, consisting of normal recurring
accruals, that the Company considers necessary to present fairly such data for
an interim period. Operating results for the six months ended August 31, 1996
are not necessarily indicative of the results that may be expected for the full
year ending February 28, 1997. The summary consolidated financial data presented
below as of February 29, 1996, and for each of the years in the three-year
period ended February 29, 1996, were derived from the Company's Consolidated
Financial Statements set forth in Annex V hereto, which have been audited by
KPMG Peat Marwick LLP, independent auditors. The summary consolidated financial
data should be read in conjunction with the Company's Consolidated Financial
Statements, the Company's unaudited interim Consolidated Financial Statements,
and the information in the Company's "Management's Discussion and Analysis of
Results of Operations and Financial Condition" set forth in Annex V hereto.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
AUGUST 31, FEBRUARY 29 OR 28,
------------------- --------------------------------
1996 1995 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net sales and operating revenues........................ $3,382 $2,992 $7,029 $5,583 $4,131
Cost of sales, buying and warehousing................... 2,624 2,304 5,394 4,198 3,025
------ ------ ------ ------ ------
Gross profit......................................... 758 688 1,635 1,385 1,106
------ ------ ------ ------ ------
Selling, general and administrative expenses............ 669 575 1,323 1,106 892
Interest expense........................................ 11 8 25 10 5
------ ------ ------ ------ ------
Total expenses.......................................... 680 583 1,348 1,116 897
------ ------ ------ ------ ------
Earnings before income taxes......................... 78 105 287 269 209
Provision for income taxes.............................. 30 39 108 101 77
------ ------ ------ ------ ------
Net earnings......................................... $ 48 $ 66 $ 179 $ 168 $ 132
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF
AUGUST AS OF
31, FEBRUARY
1996 29, 1996
------ ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......................................... $ 900 $ 905
Total assets............................................ 2,731 2,526
Total debt.............................................. 606 493
Total stockholders' equity.............................. 1,114 1,064
</TABLE>
16
<PAGE>
THE CIRCUIT CITY GROUP
SUMMARY FINANCIAL DATA
The summary financial data presented below as of August 31, 1996, for the
six months ended August 31, 1996 and 1995 were derived from the Circuit City
Group's unaudited interim Financial Statements set forth in Annex VI hereto,
which include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary to present fairly such data for an interim period.
Operating results for the six months ended August 31, 1996 are not necessarily
indicative of the results that may be expected for the full year ending February
28, 1997. The summary financial data presented below as of February 29, 1996,
and for each of the years in the three-year period ended February 29, 1996, were
derived from the Circuit City Group's Financial Statements set forth in Annex VI
hereto, which have been audited by KPMG Peat Marwick LLP, independent auditors.
The summary financial data should be read in conjunction with the Circuit City
Group's Financial Statements, the Circuit City Group's unaudited interim
Financial Statements and the information in "Management's Discussion and
Analysis of Results of Operations and Financial Condition" set forth in Annex VI
hereto, as well as the Company's Consolidated Financial Statements, the
Company's unaudited interim Consolidated Financial Statements, and the
information in the Company's "Management's Discussion and Analysis of Results of
Operations and Financial Condition" set forth in Annex V hereto.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
AUGUST 31, FEBRUARY 29 OR 28,
------------------- --------------------------------
1996 1995 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net sales and operating revenues........................ $3,125 $2,865 $6,753 $5,506 $4,114
Cost of sales, buying and warehousing................... 2,390 2,188 5,142 4,126 3,010
------ ------ ------ ------ ------
Gross profit......................................... 735 677 1,611 1,380 1,104
------ ------ ------ ------ ------
Selling, general and administrative expenses............ 647 562 1,294 1,095 887
Interest expense........................................ 9 6 21 9 5
------ ------ ------ ------ ------
Total expenses.......................................... 656 568 1,315 1,104 892
------ ------ ------ ------ ------
Earnings before income taxes and Inter-Group Interest
in the CarMax Group................................ 79 109 296 276 212
Provision for income taxes.............................. 30 41 112 104 78
------ ------ ------ ------ ------
Earnings before Inter-Group Interest in the CarMax
Group.............................................. 49 68 184 172 134
Net loss related to Inter-Group Interest in the CarMax
Group................................................ 1 2 5 4 2
------ ------ ------ ------ ------
Net earnings............................................ $ 48 $ 66 $ 179 $ 168 $ 132
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF
AUGUST AS OF
31, FEBRUARY
1996 29, 1996
------ ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital......................................... $ 867 $ 857
Total assets............................................ 2,600 2,427
Total debt.............................................. 482 396
Group equity............................................ 1,114 1,064
</TABLE>
17
<PAGE>
THE CARMAX GROUP
SUMMARY FINANCIAL DATA
The summary financial data presented below as of August 31, 1996, and for
the six months ended August 31, 1996 and 1995 were derived from the CarMax
Group's unaudited interim Financial Statements set forth in Annex VII hereto,
which include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary to present fairly such data for an interim period.
Operating results for the six months ended August 31, 1996 are not necessarily
indicative of the results that may be expected for the full year ending February
28, 1997. The summary financial data presented below as of February 29, 1996,
and for each of the years in the three-year period ended February 29, 1996, were
derived from the CarMax Group's Financial Statements set forth in Annex VII
hereto, which have been audited by KPMG Peat Marwick LLP, independent auditors.
The summary financial data should be read in conjunction with the CarMax Group's
Financial Statements, the CarMax Group's unaudited interim Financial Statements,
and the information in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" set forth in Annex VII hereto, as well as
the Company's Consolidated Financial Statements, the Company's unaudited interim
Consolidated Financial Statements, and the information in the Company's
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" set forth in Annex V hereto.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
AUGUST 31, FEBRUARY 29 OR 28,
----------------- ------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net sales and operating revenues...................... $257 $128 $276 $ 77 $ 16
Cost of sales......................................... 234 116 252 72 14
---- ---- ---- ---- ----
Gross profit....................................... 23 12 24 5 2
---- ---- ---- ---- ----
Selling, general and administrative expenses.......... 22 13 29 11 5
Interest expense...................................... 2 2 4 1 --
---- ---- ---- ---- ----
Total expenses........................................ 24 15 33 12 5
---- ---- ---- ---- ----
Loss before income tax benefit..................... 1 3 9 7 3
Income tax benefit.................................... -- 1 4 3 1
---- ---- ---- ---- ----
Net loss........................................... $ 1 $ 2 $ 5 $ 4 $ 2
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
AS
OF AS
AUGUST OF
31, FEBRUARY
1996 29, 1996
---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital....................................... $ 33 $ 47
Total assets.......................................... 137 103
Total debt............................................ 124 97
Accumulated group deficit............................. 12 11
</TABLE>
18
<PAGE>
RISK FACTORS
SHAREHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS ON ONE GROUP COULD AFFECT THE
OTHER
Notwithstanding the allocation of assets and liabilities (including
contingent liabilities) and shareholders' equity between the Circuit City Group
and the CarMax Group for the purpose of preparing their respective financial
statements, holders of Circuit City Stock and CarMax Stock will be shareholders
of the Company and will continue to be subject to all of the risks associated
with an investment in the Company and all of its businesses, assets and
liabilities. Such allocation and the change in the equity structure of the
Company contemplated by the CarMax Stock Proposal will not affect title to the
assets or responsibility for the liabilities of the Company or any of its
subsidiaries. As a result, the implementation of the CarMax Stock Proposal will
not affect the rights of holders of any debt of the Company or its subsidiaries.
Financial impacts arising from either Group that affect the Company's results of
operations or financial condition could affect the results of operations or
financial condition of the other Group and the market price of the series of
Common Stock relating to that Group. In addition, any net losses of the Circuit
City Group or the CarMax Group and dividends or distributions on, or repurchases
of, Circuit City Stock or CarMax Stock will reduce the legally available funds
of the Company available for payment of dividends on both the Circuit City Stock
and the CarMax Stock. Accordingly, the Company's consolidated financial
information should be read in conjunction with the financial information of the
Circuit City Group and the CarMax Group.
If the CarMax Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, the Company will provide to holders of
Circuit City Stock and CarMax Stock financial statements, management's
discussion and analysis of financial condition and results of operations,
business descriptions and other information for each Group and for the
consolidated Company. The financial statements of each Group would reflect the
financial position, results of operations and cash flows of the businesses
included therein. Consistent with the Articles and relevant policies, such
Group's financial statements would also include allocated portions of the
Company's corporate assets and liabilities (including contingent liabilities)
that are not separately identified with the operations of a specific Group. See
"Proposal 1 -- The CarMax Stock Proposal -- Certain Management and Allocation
Policies" and the financial information of the Company, the Circuit City Group
and the CarMax Group set forth in Annexes V, VI, and VII hereto, respectively.
LIMITED SEPARATE SHAREHOLDER VOTING RIGHTS; EFFECTS ON VOTING POWER
Under the CarMax Stock Proposal, holders of Circuit City Stock and CarMax
Stock would have only the rights customarily held by common shareholders of the
Company and would not have any rights related to their corresponding Group or
have any right to vote on matters as a separate voting group other than in
limited circumstances as provided under the VSCA. Under the VSCA, the holders of
Circuit City Stock and CarMax Stock would vote together as a single voting
group, except as to certain mergers and statutory share exchanges and certain
amendments to the Articles. Accordingly, if a separate vote on a matter by the
holders of either the Circuit City Stock or CarMax Stock is not required under
the VSCA, and if the Board of Directors does not require a separate vote, any
series that is entitled to more than the number of votes required to approve
such matter will be in a position to control the outcome of the vote on such
matter even if the matter involved a divergence or the appearance of a
divergence of the interests between the holders of the Circuit City Stock and
CarMax Stock. Conversely, if a separate vote on a matter by the holders of
either Circuit City Stock or CarMax Stock is required under the VSCA or by the
Board of Directors, the holders of either the Circuit City Stock or CarMax Stock
could prevent approval of such matter, notwithstanding the fact that the holders
of a majority or more than two-thirds, as applicable, of the total number of
votes cast or entitled to be cast with respect to both the Circuit City Stock
and CarMax Stock had voted in favor of it. See "Proposal 1 -- The CarMax Stock
Proposal -- Description of Circuit City Stock and CarMax Stock -- Voting Rights"
and " -- Potential Diverging Interests -- Allocation of Proceeds of Mergers or
Statutory Share Exchanges."
The relative voting power of shares of Circuit City Stock and CarMax Stock
would fluctuate from time to time, with each share of Circuit City Stock having
one vote and each share of CarMax Stock having a variable number of votes, based
upon the ratio, over a specified period, of the time-weighted average Market
Value of one share of CarMax Stock to the time-weighted average Market Value of
one share of Circuit City Stock. This formula is intended to equate the
proportionate voting rights of each series of Common Stock to their respective
Market Values at the time of any vote. The Company anticipates that the Circuit
City Stock will initially represent a substantial majority of the voting power
of all the Company's stock entitled to vote in the election of directors. Market
Value could be influenced by many factors, including the results of operations
of the Company and each of the Groups, trading volume, share issuances and
repurchases and general economic and market conditions. See "Proposal 1 -- The
CarMax Stock Proposal -- Description of Circuit City Stock and CarMax
Stock -- Voting Rights." Changes in the aggregate votes or relative voting power
of the CarMax Stock or Circuit City Stock could result from the market's
reaction to a decision by the Company's management or Board of Directors that is
perceived
19
<PAGE>
to disparately affect one series of Common Stock in comparison to the other or
the issuance or repurchase of shares of Common Stock of either series. See
" -- Limited Approval Rights of Future Issuances."
FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS; NO DEFINITIVE PRECEDENT UNDER
VIRGINIA LAW
Under Virginia law, each member of the Board of Directors must act in
accordance with his or her good faith business judgment of the best interests of
the Company, taking into consideration the interests of all common shareholders.
As further described below, the CarMax Stock Proposal may give rise to occasions
when the interests of the holders of Circuit City Stock and the holders of
CarMax Stock may diverge or appear to diverge. Although the Company is not aware
of any precedent concerning the manner in which principles of Virginia law would
be applied in the context of the capital structure contemplated by the CarMax
Stock Proposal, principles of Virginia law provide that directors must act in
accordance with their good faith business judgment of the corporation's best
interests, taking into consideration the interests of all common shareholders
regardless of class or series. Under these principles of Virginia law, a good
faith determination made by a disinterested and adequately informed Board of
Directors with respect to any matter having a disparate impact upon the holders
of Circuit City Stock and the holders of CarMax Stock would be a defense to any
challenge to such determination made by or on behalf of either group of holders.
Nevertheless, a Virginia court hearing a case involving such a challenge may
decide to apply principles of Virginia law other than those discussed above, or
may fashion new principles of Virginia law, in order to decide such a case,
which would be a case of first impression. There may arise circumstances
involving a divergence of interests in which the Board of Directors is held to
have properly discharged its duty to act in accordance with its good faith
business judgment of the best interests of the Company, but in which holders of
either the Circuit City Stock or the CarMax Stock consider themselves to be
disadvantaged relative to the other series. In such a case, such holders would
not have any other remedy under Virginia law with respect to the circumstances
giving rise to the divergence of interests.
Disproportionate ownership interests of members of the Board of Directors
in the Circuit City Stock and the CarMax Stock or disparate values of the
Circuit City Stock and the CarMax Stock could create or appear to create
potential conflicts of interest when directors are faced with decisions that
could have different implications for the different series. See " -- Potential
Diverging Interests."
POTENTIAL DIVERGING INTERESTS
The existence of separate series of Common Stock could give rise to
occasions when the interests of the holders of Circuit City Stock and holders of
CarMax Stock diverge or appear to diverge. Examples include determinations by
the Board of Directors to (i) pay or omit the payment of dividends on Circuit
City Stock or CarMax Stock, (ii) allocate consideration to be received by
holders of each of the series of Common Stock in connection with a merger or
consolidation involving the Company, (iii) convert one series of Common Stock
into shares of the other series of Common Stock, (iv) approve certain
dispositions of assets attributed to any Group, (v) so long as there is an
Inter-Group Interest, allocate the proceeds of issuances of CarMax Stock either
to the Circuit City Group in respect of its Inter-Group Interest or to the
CarMax Group and (vi) make operational and financial decisions with respect to
one Group that could be considered to be detrimental to the other Group,
including whether to make transfers of funds between Groups, as described below.
When making decisions with regard to matters that create potential diverging
interests, the Board of Directors would act in accordance with the terms of the
Articles, the management and allocation policies described in "Proposal 1 -- The
CarMax Stock Proposal -- Certain Management and Allocation Policies" to the
extent applicable and its fiduciary duties. See " -- Fiduciary Duties of the
Board of Directors; No Definitive Precedent Under Virginia Law." The Board of
Directors could also from time to time refer matters involving such conflict
issues to an existing committee or one or more new committees of the Board of
Directors and have such committee or committees report to the Board of Directors
on such matters or decide such matters to the extent permitted by the Bylaws and
applicable law. Each of the foregoing potential conflicts of interests is
discussed below:
NO ASSURANCE OF PAYMENT OF DIVIDENDS. The Board of Directors currently
intends that the dividend policy applicable to the Circuit City Stock would
be the same as the dividend policy applicable to the Existing Common Stock
and believes that implementation of the CarMax Stock Proposal would not
adversely affect the Company's ability to pay dividends on the Circuit City
Stock. The Board of Directors currently does not intend to pay dividends on
the CarMax Stock. Determinations as to the future dividends on the Circuit
City Stock and the CarMax Stock would be based primarily upon the financial
condition, results of operations and business requirements of the relevant
Group and the Company as a whole. Dividends on the Circuit City Stock and
the CarMax Stock, if any, would be payable out of the lesser of (i) all
assets of the Company legally available for the payment of dividends and
(ii) the Available Dividend Amount with respect to the relevant Group.
Subject only to such limitations, the Board of Directors reserves the right
to
20
<PAGE>
declare and pay dividends on the Circuit City Stock and the CarMax Stock in
any amount and could, in its sole discretion, declare and pay dividends
exclusively on the Circuit City Stock, exclusively on the CarMax Stock or
on both, in equal or unequal amounts, notwithstanding the relative amounts
of the Circuit City Group Available Dividend Amount and the CarMax Group
Available Dividend Amount, the amount of prior dividends declared on each
series, the respective voting or liquidation rights of each series or any
other factor. In addition, net losses of any Group, dividends and
distributions on Circuit City Stock, CarMax Stock or any Preferred Stock
and any repurchases of Circuit City Stock, CarMax Stock or certain
Preferred Stock would reduce the assets of the Company legally available
for future dividends on the Circuit City Stock and the CarMax Stock. See
"Proposal 1 -- The CarMax Stock Proposal -- Dividend Policy" and
" -- Description of Circuit City and CarMax Stock -- Dividends."
ALLOCATION OF PROCEEDS OF MERGERS OR STATUTORY SHARE EXCHANGES. The
CarMax Stock Proposal Amendments do not contain any provisions governing
how consideration to be received by holders of Common Stock in connection
with a merger or statutory share exchange involving the entire Company is
to be allocated among holders of different series of Common Stock. In any
such merger or statutory share exchange, the percentage of the
consideration to be allocated to holders of any series of Common Stock will
be determined by the Board of Directors and may be materially more or less
than that which might have been allocated to such holders had the Board of
Directors chosen a different method of allocation. See " -- Limited
Separate Shareholder Voting Rights; Effects on Voting Power."
OPTIONAL CONVERSION OF SERIES OF COMMON STOCK. The Board of Directors
could, in its sole discretion, determine to convert shares of the series of
Common Stock of one Group into shares of the series of Common Stock of the
other Group at a 15% premium at any time or a 10% premium following any
dividend or partial redemption undertaken in connection with a disposition
of all or substantially all of the properties or assets attributed to the
Group whose stock is being converted. Any such determination could be made
at a time when either or both of the Circuit City Stock and the CarMax
Stock may be considered to be overvalued or undervalued. Any conversion at
any premium would dilute the interests in the Company of the holders of the
series of Common Stock not subject to conversion. In addition, any such
conversion of either series of Common Stock into the other would preclude
holders of both series of Common Stock from retaining their investment in a
security that is intended to reflect separately the performance of the
relevant Group. Holders of shares of the series of Common Stock converted
may receive a greater or lesser premium than any premium that might be paid
by a third-party buyer of all or substantially all of the assets attributed
to the Group whose stock is converted. In determining whether to convert
one series of Common Stock into the other series of Common Stock, the Board
of Directors would act in accordance with its good faith business judgment
that any such conversion is in the best interests of the Company, taking
into consideration the interests of all common shareholders, including both
the holders of the series of Common Stock being converted and the holders
of the series of Common Stock into which it is to be converted. See
"Proposal 1 -- The CarMax Stock Proposal -- Description of Circuit City
Stock and CarMax Stock -- Conversion and Redemption."
DISPOSITIONS OF GROUP ASSETS. Assuming the assets attributed to any
Group represent less than substantially all of the properties and assets of
the Company, the Board of Directors could, in its sole discretion and
without shareholder approval, approve sales and other dispositions of any
amount of the properties and assets attributed to such Group, because
Virginia law and the Articles would require shareholder approval only for a
sale or other disposition of all or substantially all of the properties and
assets of the entire Company. The proceeds from any such disposition would
be assets attributed to such Group and used for its benefit, subject to the
management and allocation policies described under "Proposal 1 -- The
CarMax Stock Proposal -- Certain Management and Allocation Policies." The
Articles would contain provisions that, in the event of a Disposition of
all or substantially all of the properties and assets attributed to any
Group, other than in a Related Business Transaction, require the Company to
(i) distribute to holders of the series of Common Stock relating to the
Group subject to such Disposition an amount in cash and/or securities or
other property equal to their proportionate interest in the Fair Value of
the Net Proceeds of such Disposition either by special dividend or
redemption of all or part of the shares of such series of Common Stock or
(ii) convert the outstanding shares of such Common Stock into a number of
shares of the series of Common Stock relating to the other Group equal to
110% of the ratio, calculated over a period of time, of the average Market
Value of one share of the Common Stock relating to the Group subject to
such Disposition to the average Market Value of one share of Common Stock
relating to the other Group. See "Proposal 1 -- The CarMax Stock
Proposal -- Description of Circuit City Stock and CarMax Stock --
Conversion and Redemption." The terms of the Common Stock do not require
the Board of Directors to select the option that would result in the
distribution with the highest value to the holders of the Common Stock
relating to the Group subject to such Disposition or with the smallest
effect on the Common Stock relating to the other Group. The Board of
Directors would select an option based upon its good faith business
judgment that such option is in the best interests of
21
<PAGE>
the Company, taking into consideration the interests of all common
shareholders. See " -- Fiduciary Duties of the Board of Directors; No
Definitive Precedent under Virginia Law."
ALLOCATION OF PROCEEDS UPON ISSUANCE OF CARMAX STOCK. If the Circuit
City Group, at the time the Company issues any shares of CarMax Stock,
holds an Inter-Group Interest representing an interest in the equity value
of the CarMax Group, the Board of Directors would, in its sole discretion,
determine whether to allocate all or any portion of the proceeds of such
issuance to the CarMax Group or to the Circuit City Group. To the extent
the net proceeds of such issuance of shares of CarMax Stock are allocated
to the CarMax Group, the financial statements of the CarMax Group would
reflect the receipt of such proceeds. To the extent such net proceeds are
allocated to the Circuit City Group, the financial statements of the
Circuit City Group would reflect a reduction in the Inter-Group Interest
and the receipt of such proceeds. Any such allocation may favor one Group
at the expense of the other. For example, the decision to allocate proceeds
to one Group may adversely affect the ability of the other Group to obtain
funds. Any such allocation will be made by the Board of Directors in its
good faith business judgment that such allocation is in the best interests
of the Company, taking into consideration the interests of all common
shareholders. See " -- Fiduciary Duties of the Board of Directors; No
Definitive Precedent Under Virginia Law." In addition, if the Company
issues shares of CarMax Stock for the account of the Circuit City Group in
respect of the Circuit City Group's Inter-Group Interest in the CarMax
Group, the voting power of holders of shares of CarMax Stock immediately
prior to such issuance would be diluted even though no consideration
received for such shares would be allocated to the CarMax Group.
OPERATIONAL AND FINANCIAL DECISIONS. The Board of Directors could, in
its sole discretion, from time to time, make operational and financial
decisions or implement policies that affect disproportionately the
businesses of the Circuit City Group and the CarMax Group, such as
transfers of services, funds or assets between Groups and other inter-Group
transactions, the allocation of financing opportunities in the public
markets and the allocation of business opportunities, resources and
personnel that may be suitable for both Groups. Any such decision may favor
one Group at the expense of the other. For example, the decision to obtain
funds for one Group may adversely affect the ability of the other Group to
obtain funds sufficient to implement its growth strategies. All such
decisions will be made by the Board of Directors in its good faith business
judgment or in accordance with procedures and policies adopted by the Board
of Directors from time to time, including the policies described under
"Proposal 1 -- The CarMax Stock Proposal -- Certain Management and
Allocation Policies," to ensure that such decisions will be made in a
manner consistent with the best interests of the Company, taking into
consideration the interests of all common shareholders. For further
discussion of potential divergence of interests, see " -- Fiduciary Duties
of the Board of Directors; No Definitive Precedent Under Virginia Law,"
" -- Allocation of Financing Costs; Transfers of Funds Between Groups;
Equity Contributions" and "Proposal 1 -- The CarMax Stock
Proposal -- Certain Management and Allocation Policies."
MANAGEMENT AND ALLOCATION POLICIES SUBJECT TO CHANGE
The Company's policies described herein with respect to dividends, the
allocation of corporate expenses, assets and liabilities, the allocation of
proceeds of sales of Circuit City Stock and CarMax Stock and other matters may
be modified or rescinded, or additional policies may be adopted, in the sole
discretion of the Board of Directors without approval of the shareholders,
although the Board of Directors has no present intention to do so. Any
determination of the Board of Directors to modify or rescind such policies, or
to adopt additional policies, including any such decision that would have
disparate impacts upon holders of Circuit City Stock and holders of CarMax
Stock, would be made in accordance with the Board of Director's good faith
business judgment of the best interests of the Company, taking into
consideration the interests of all common shareholders. See " -- Potential
Diverging Interests."
ALLOCATION OF FINANCING COSTS; TRANSFERS OF FUNDS BETWEEN GROUPS; EQUITY
CONTRIBUTIONS
As described under "Proposal 1 -- The CarMax Stock Proposal -- Certain
Management and Allocation Policies," most financial activities will be managed
by the Company on a centralized basis. Such financial activities include the
investment of surplus cash, the issuance and repayment of short-term and
long-term debt and the issuance and repurchase of any Preferred Stock. In the
event that cash or other property allocated to one Group is transferred to the
other Group (other than transfers made with respect to the Inter-Group Interest
upon the payment of any dividend or other distribution on CarMax Stock), such
transfer would be accounted for in one of the following ways, as determined by
the Board of Directors: (i) as a reallocation of pooled debt, as described under
the caption referred to above, or Preferred Stock, (ii) as an increase or
decrease in the Number of Shares Issuable with Respect to the Inter-Group
Interest, (iii) as a sale of assets between the two Groups, or (iv) as a
short-term or long-term loan from one Group to the other Group. There are no
specific criteria to determine which of the foregoing would be applied to a
particular transfer of cash or property from one Group to the other
22
<PAGE>
Group. Such determination would be made by the Board of Directors in the
exercise of its business judgment based upon all relevant circumstances,
including the financing needs and objectives of the recipient Group, the
investment objectives of the transferring Group, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions. Any such determination could affect the amount of
interest or dividend expense reflected in the financial statements of the
Circuit City Group and the CarMax Group. All transfers of material assets from
one Group to the other Group will be deemed to be made on a fair value basis for
the foregoing purposes, as determined by the Board of Directors.
A portion of the Company's debt and any Preferred Stock may be allocated to
each Group, and interest or dividend expense will be charged to each Group,
based on the weighted average interest or dividend rate of such pooled debt or
Preferred Stock. As a result, changes in the amount of pooled debt or Preferred
Stock would affect such weighted average interest or dividend rate and,
therefore, would affect the interest or dividend expense charged to both Groups
in respect of their allocated portions. In addition, in obtaining its financing
through increases of its allocated pooled debt or Preferred Stock balance, the
Group receiving the proceeds would receive a "benefit" or "detriment" to the
extent such weighted average rate is lower or higher, respectively, than the
market rate for a hypothetical borrowing of debt or issuance of Preferred Stock
by such Group if such Group were a stand-alone corporation. Debt and Preferred
Stock of the Company also may be allocated in its entirety to one Group as
determined by the Board of Directors.
The Board of Directors could, in its sole discretion, determine that a
transfer of cash or other property from one Group to the other Group should be
accounted for as a short-term or long-term loan. The Board of Directors would
establish the terms on which loans between the Groups would be made, including
interest rate, amortization schedule, maturity and redemption terms. In the
event that the Board of Directors determines that a transfer of funds between
the Circuit City Group and the CarMax Group should be accounted for as a loan,
the Group receiving the funds would receive a "benefit" or "detriment" to the
extent the rate determined by the Board of Directors is lower or higher,
respectively, than the market rate for a hypothetical borrowing of debt by such
Group if such Group were a stand-alone corporation.
The Board of Directors also could, in its sole discretion, determine from
time to time to contribute, as additional equity, cash or other property of the
Circuit City Group to the CarMax Group, thereby increasing the Inter-Group
Interest. Similarly, the Board of Directors could, in its sole discretion,
determine from time to time to transfer cash or other property from the CarMax
Group to the Circuit City Group as a reduction in such equity, thereby
decreasing the Inter-Group Interest. Although any increase in the Inter-Group
Interest resulting from an equity contribution by the Circuit City Group to the
CarMax Group or any decrease in the Inter-Group Interest resulting from a
transfer of funds from the CarMax Group to the Circuit City Group would be
determined by reference to the then current Market Value of CarMax Stock, such
changes could occur at a time when such shares could be considered undervalued
or overvalued. The holders of outstanding shares of CarMax Stock would not have
an opportunity to participate in a similar transaction.
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS ATTRIBUTED TO A GROUP
The terms of the Common Stock provide that upon a Disposition of all or
substantially all of the properties and assets attributed to any Group, the
Company would be required, subject to certain exceptions, either to pay a
special dividend on, or redeem some or all of, the outstanding shares of the
series of Common Stock relating to such Group or convert such Common Stock into
shares of the series of Common Stock relating to the other Group. If the Group
subject to such Disposition were instead a separate, independent company and its
shares were acquired by another person, certain costs of such Disposition,
including corporate level taxes, might not be payable in connection with such an
acquisition. As a result, the consideration that would be received by
shareholders of such a separate independent company in connection with such an
acquisition might be greater than the Fair Value of the Net Proceeds that would
be received by holders of the series of Common Stock relating to such Group if
the assets attributed to such Group were sold. In addition, no assurance can be
given that the Net Proceeds per share of the series of Common Stock relating to
such Group to be received in connection with a Disposition of all of the assets
attributed to such Group will be equal to or more than the market value per
share of such Common Stock prior to or after announcement of such Disposition.
See " -- No Assurances as to Market Price" and "Proposal 1 -- The CarMax Stock
Proposal -- Description of Circuit City Stock and CarMax Stock -- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Common Stock."
LIMITED APPROVAL RIGHTS OF FUTURE ISSUANCES
The approval of the shareholders of the Company will not be solicited by
the Company for the issuance from the authorized but unissued shares of Circuit
City Stock or CarMax Stock (including from shares that were previously
designated
23
<PAGE>
as part of the other series but are unissued) unless such approval is deemed
advisable by the Board of Directors or is required by stock exchange regulations
or under the VSCA.
LIMITATIONS ON POTENTIAL ACQUISITIONS OF A GROUP
If the Circuit City Group and the CarMax Group were organized as
stand-alone corporations, any person interested in acquiring either of such
corporations without negotiation with management could seek control of the
outstanding stock of such corporation by means of a tender offer or proxy
contest. Although adoption of the CarMax Stock Proposal would create two series
of Common Stock that are intended to reflect the separate performance of the
Groups, a person interested in acquiring only one Group without negotiation with
the Company's management would still be required to seek control of the voting
power represented by all of the outstanding capital stock of the Company,
including the series of Common Stock related to the other Group. See
" -- Limited Separate Shareholder Rights; Effects on Voting Power" and "Proposal
1 -- The CarMax Stock Proposal -- Description of Circuit City Stock and CarMax
Stock -- Voting Rights."
NO ASSURANCES AS TO MARKET PRICE
Because there has been no prior market for the Circuit City Stock or the
CarMax Stock, there can be no assurance as to their market prices following the
CarMax Stock Offering and the Common Stock Redesignation.
The market prices of the Circuit City Stock and the CarMax Stock would be
determined in the trading markets and could be influenced by many factors,
including the consolidated results of the Company, as well as the respective
performances of the Circuit City Group and the CarMax Group, investors'
expectations for the Company as a whole, the Circuit City Group and the CarMax
Group, trading volume, share issuances and repurchases and general economic
market conditions. There can be no assurance that investors would assign values
to the Circuit City Stock and the CarMax Stock based on the reported financial
results and prospects of the separate Groups or the dividend policies
established by the Board of Directors with respect to such Groups. Accordingly,
financial effects on either Group that affect the Company's consolidated results
of operations or financial condition could affect the market price of shares of
both the Circuit City Stock and the CarMax Stock. In addition, the Company
cannot predict the impact on their market prices of certain terms of the Circuit
City Stock or CarMax Stock, including the respective redemption and conversion
rights applicable upon the disposition of substantially all the assets
attributed to either Group, the ability of the Company to convert shares of one
series of Common Stock into shares of the other series of Common Stock, the
discretion of the Board of Directors to make various determinations relating to
the separate series, or the availability of additional shares of either series
for future sale, including shares of CarMax Stock attributable to the Circuit
City Group's Inter-Group Interest in the CarMax Group. There can also be no
assurance that the CarMax Stock will be included in any stock market index in
which the Existing Common Stock is now included, or that the Circuit City Stock
will continue to be included in any such index. Not being included in a
particular index could adversely affect demand for the CarMax Stock or the
Circuit City Stock and, consequently, the market price thereof.
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<PAGE>
GENERAL
This Proxy Statement and the enclosed form of proxy are being furnished in
connection with the solicitation of proxies by the Board of Directors for use at
the Special Meeting to be held at 8:00 a.m., Eastern Time, on Friday, January
24, 1997 at the offices of McGuire, Woods, Battle & Booth, L.L.P., for the
purposes set forth in the accompanying Notice of Special Meeting of
Shareholders.
On December 11, 1996, the date for determining shareholders entitled to
vote at the meeting, 97,953,294 shares of the Existing Common Stock were
outstanding and entitled to vote. Each such share of Existing Common Stock
entitles the holder thereof to one vote. Any shareholder giving a proxy may
revoke it at any time before it is voted by delivering another proxy or written
notice of revocation to the Company's Secretary or by attending and voting in
person at the meeting. A proxy, if executed and not revoked, will be voted for
each of Proposals 1 through 5 described herein, unless it contains specific
instructions to the contrary, in which event it will be voted in accordance with
such instructions. If necessary and unless the shares represented by the proxy
are voted against the proposals herein, the persons named in the proxy also may
vote in favor of a proposal to adjourn the Special Meeting to a subsequent date
or dates without further notice, in order to solicit and obtain sufficient votes
to approve the matters being considered at the Special Meeting.
A majority of the votes entitled to be cast on matters to be considered at
the meeting constitutes a quorum. If a share is represented for any purpose at
the meeting, it is 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 ("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 such meeting. Approval of Proposals
1, 2 and 3 requires the affirmative vote of the holders of a majority of the
outstanding shares of Existing Common Stock. Proposals 4 and 5 will be approved
if the votes cast in favor of the action exceed the votes cast opposing the
action. Abstentions and Broker Shares not voted on a particular matter will have
the effect of a vote against Proposals 1, 2 and 3 but will have no effect on the
action taken with respect to Proposals 4 and 5.
Participants in the 1984 Circuit City Stores, Inc. Employee Stock Purchase
Plan (the "Stock Purchase Plan") will receive proxy soliciting material for the
shares held by First Union National Bank of North Carolina, the Stock Purchase
Plan Custodian, on each participant's behalf. That proxy should be returned,
properly executed, to the Custodian (not to the Company) in the envelope
provided. The Custodian will vote returned proxies in accordance with the Stock
Purchase Plan participants' instructions. If a participant does not vote the
Stock Purchase Plan shares, the Custodian will vote such shares in accordance
with the recommendations of the Company's management.
In addition to the solicitation of proxies by mail, the Company's officers
and regular employees, without compensation other than regular compensation, may
solicit proxies by telephone, telegraph, electronic means and personal
interview. The Company also has retained Morrow & Co., Inc. of New York, New
York 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 $8,500 plus out-of-pocket expenses. The Company will bear the cost of
all solicitation.
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<PAGE>
COMMON STOCK PRICE RANGE
The following table sets forth, for the fiscal years indicated, the high
and low sales prices per share for the Existing Common Stock on the NYSE
Composite Tape, as reported in THE WALL STREET JOURNAL.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29, HIGH LOW DIVIDEND
- ------------------------------------------------------------------------------------------------ ------ ------ --------
<S> <C> <C> <C>
1995:
First Quarter................................................................................. $23.00 $17.25 $ .020
Second Quarter................................................................................ 24.63 19.50 .025
Third Quarter................................................................................. 27.50 23.13 .025
Fourth Quarter................................................................................ 25.13 21.00 .025
1996:
First Quarter................................................................................. 29.13 21.50 .025
Second Quarter................................................................................ 37.13 26.25 .030
Third Quarter................................................................................. 38.00 28.13 .030
Fourth Quarter................................................................................ 31.25 25.00 .030
1997:
First Quarter................................................................................. 36.00 28.88 .030
Second Quarter................................................................................ 38.75 29.25 .035
Third Quarter................................................................................. 36.88 30.25 .035
</TABLE>
On October 31, 1996, the last full day the Existing Common Stock traded
before the public announcement of the CarMax Stock Proposal, the reported
closing sales price on the NYSE for the Existing Common Stock was $32.75 per
share. On December 17, 1996, the last full day the Existing Common Stock traded
before the printing of this Proxy Statement, the reported closing sales price on
the NYSE for the Existing Common Stock was $29.75 per share.
As of December 11, 1996, there were approximately 8,206 holders of record
of Existing Common Stock.
The Company has paid a cash dividend on the Existing Common Stock in each
of the last 10 years. The dividend has increased from $.01 in fiscal 1987 to
$.115 per share in fiscal 1996. For a description of the Company's intended
dividend policy following approval of the CarMax Stock Proposal, see "Proposal
1 -- The CarMax Stock Proposal -- Dividend Policy."
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<PAGE>
PROPOSAL 1 -- THE CARMAX STOCK PROPOSAL
GENERAL
The shareholders of the Company are being asked to consider and approve the
CarMax Stock Proposal which, if approved, would authorize the CarMax Stock
Proposal Amendments as set forth in Annex II-A hereto. Such amendments would,
among other things: (i) provide for the issuance of the Company's Common Stock
in series by action of the Board of Directors, of which 125,000,000 shares would
initially be designated by the Board of Directors as Circuit City Stock and
125,000,000 shares would initially be designated as CarMax Stock, with the
preferences, limitations and relative rights thereof as set forth in the CarMax
Stock Proposal Amendments and described below, and (ii) redesignate each
outstanding share of Existing Common Stock as one share of Circuit City Stock.
Subject to approval by the Company's shareholders of the CarMax Stock
Proposal and prevailing market conditions, the Company currently plans to offer
to the public for cash in the CarMax Stock Offering shares of CarMax Stock which
will initially represent 15% to 20% of the equity value of the CarMax Group. The
Company plans to use the net proceeds of the CarMax Stock Offering to finance
part of the Company's expansion plans for the CarMax Group and to repay the
CarMax Group's allocated portion of Company indebtedness. Upon the completion of
the CarMax Stock Offering, the Circuit City Group would hold the balance of the
equity value of the CarMax Group. The Company retains the ability to offer a
greater or lesser percentage of the equity value of the CarMax Group depending
on market conditions and other circumstances that may exist at the time of the
CarMax Stock Offering.
Prior to the Special Meeting of Shareholders, the Company intends to
distribute to all shareholders entitled to vote at the meeting the Supplement to
these proxy materials setting forth certain information regarding the CarMax
Stock Offering, including the number of shares anticipated to be sold, the
anticipated range of prices at which the shares would be sold and the amount of
net proceeds expected to be raised.
The shares of CarMax Stock that the Company currently expects to issue in
the CarMax Stock Offering will be issued for the account of the CarMax Group and
the net proceeds thereof will be allocated to the CarMax Group. If shares
representing less than 15% of the equity value of the CarMax Group are sold in
the CarMax Stock Offering, the Inter-Group Interest of the Circuit City Group in
the CarMax Group would increase accordingly. If shares of CarMax Stock
representing more than 20% of the equity value of the CarMax Group are sold, the
Board of Directors will identify the number, if any, of such additional shares
issued for the account of the Circuit City Group and the number, if any, of such
additional shares issued for the account of the CarMax Group. If any of such
additional shares are issued, the Inter-Group Interest of the Circuit City Group
in the CarMax Group would decrease accordingly. The net proceeds of any such
additional issuances would be allocated to the Circuit City Group, if such
shares are issued for the account of the Circuit City Group, or allocated to the
CarMax Group, if such shares are issued for the account of the CarMax Group.
If the CarMax Stock Proposal is approved, the Company, prior to the
delivery of the shares of CarMax Stock sold in the CarMax Stock Offering, will
file with the Virginia State Corporation Commission Articles of Amendment to
effect the CarMax Stock Proposal Amendments substantially in the form set forth
in Annex II-A. At any time prior to such filing with the Virginia State
Corporation Commission, including after adoption of the CarMax Stock Proposal by
the Company's shareholders, the Board of Directors may abandon the CarMax Stock
Proposal without further action by the shareholders.
IF THE CARMAX STOCK PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS OR THE
CARMAX STOCK OFFERING IS NOT CONSUMMATED, THE EXISTING COMMON STOCK WILL NOT BE
REDESIGNATED AS CIRCUIT CITY STOCK AND THE CARMAX STOCK WILL NOT BE ISSUED.
The authorized but unissued shares of Common Stock, including Circuit City
Stock and CarMax Stock, would be available for issuance from time to time by the
Company at the discretion of the Board of Directors for any proper corporate
purpose, which could include raising capital, paying stock dividends, providing
compensation or benefits to employees or acquiring companies or businesses. The
approval of the Company's shareholders will not be solicited by the Company for
the issuance from the authorized but unissued shares of Common Stock of
additional shares of Circuit City Stock or CarMax Stock (including from shares
that were previously designated as part of the other series but are unissued)
unless such approval is deemed advisable by the Board of Directors or is
required by stock exchange regulations or under the VSCA.
BACKGROUND AND REASONS FOR THE CARMAX STOCK PROPOSAL
The CarMax Stock Proposal was adopted by the Board of Directors following
its review of various alternatives for raising additional capital to finance the
Company's expansion plans for the CarMax Group. The Board of Directors believes
27
<PAGE>
the historical price performance of the Existing Common Stock has been more
closely linked to the Circuit City Group and fails to reflect adequately the
value associated with the CarMax Group, thus preventing the Company's
shareholders from realizing the full value of their shares. At a meeting held on
June 14, 1996, the Board of Directors, after receiving a preliminary report from
management on its analysis of capital raising alternatives, authorized
management to continue its review of the Company's alternatives with the
assistance of its financial advisors. The Board of Directors met on August 23,
1996 and October 14, 1996 with its financial advisors, Morgan Stanley & Co.
Incorporated, and its legal advisors, to evaluate those alternatives.
Among the alternatives considered were: (i) the issuance and sale of
additional shares of the Existing Common Stock; (ii) the issuance and sale of a
newly designated series of Preferred Stock; (iii) the issuance of debt or debt
convertible into securities of the Company; and (iv) the issuance and sale of
equity securities of a subsidiary comprising the business of the CarMax Group.
None of the first three alternatives was considered likely to further the Board
of Director's objective of fully reflecting the value of the CarMax Group in the
market price of the Existing Common Stock. With respect to the fourth
alternative, the Board of Directors ultimately concluded that, while the
alternative might address the Board of Directors' concern regarding shareholder
value, it did not preserve the financial, strategic and operational benefits of
remaining a single corporation.
In arriving at its recommendation and determination that the CarMax Stock
Proposal is in the best interests of the Company and its shareholders, the Board
of Directors, with the assistance of its financial and legal advisors,
considered various strategic, financial, legal and tax factors and identified
the following as the principal advantages of the CarMax Stock Proposal:
(Bullet) The creation of two series of Common Stock intended to reflect
separately the performance of the Circuit City Group, including
its Inter-Group Interest in the CarMax Group, and the CarMax Group
should increase shareholder value by encouraging proper valuation
of the businesses of each of the Groups. The issuance of CarMax
Stock should result in broader and more in-depth equity research
coverage of the CarMax Group by financial analysts, enabling
investors to better understand the CarMax Group and thereby to
better understand the Company as a whole. The market price
established for the CarMax Stock would facilitate the valuation of
the Inter-Group Interest held by the Circuit City Group in the
CarMax Group.
(Bullet) The CarMax Stock should provide the Company with an additional
equity security that can be used to raise capital and can be
issued in connection with acquisitions and investments. Because
the Board of Directors does not expect to declare a dividend on
the CarMax Stock for the foreseeable future, any issuance of such
stock, in connection with an acquisition or otherwise, would not
reduce cash flow that would otherwise be available for capital
investments. In addition, the Company may be able to reduce its
cost of capital because of the improved equity valuation that
could result from the implementation of the CarMax Stock Proposal.
(Bullet) By remaining a single entity, the Company would continue to enjoy
certain financial, strategic and operational benefits that would
not be available if the two Groups were separate legal entities.
For example, both Groups would benefit from the oversight of
certain key, experienced management personnel, administrative
economies and lower borrowing costs.
(Bullet) By remaining a single entity, the Company also would maintain
flexibility that would not be available if the two Groups were
separate legal entities. This includes the flexibility to issue to
the public as much as 100% of the equity value of the CarMax Group
while maintaining the ability to file consolidated tax returns.
(Bullet) Separate equity securities would provide a better framework to
structure for employees of each Group incentive plans that can be
tied directly to both the business results and the stock price
performance of such Group.
(Bullet) The CarMax Stock Proposal would provide the Board of Directors
with the flexibility to determine separate dividend policies for
each of the Circuit City Stock and CarMax Stock.
The Board of Directors also considered the following potential adverse
consequences of the CarMax Stock Proposal:
(Bullet) The more complex capital structure resulting from the CarMax Stock
Proposal may inhibit the efficient valuation of either or both
series of the Common Stock.
(Bullet) Holders of Circuit City Stock and CarMax Stock would continue to
be subject to the risks associated with an investment in a single
company and all of the Company's businesses, assets and
liabilities. See "Risk Factors -- Shareholders of One Company;
Financial Effects on One Group Could Affect the Other."
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<PAGE>
(Bullet) The potential diverging interests of the two Groups and the issues
that could arise in resolving such conflicts. See " -- Certain
Management and Allocation Policies" and "Risk Factors -- Potential
Diverging Interests."
(Bullet) The potential negative effects of using CarMax Stock in connection
with an acquisition, such as the limitation on using the pooling
method of accounting for, and the possible inability or increased
difficulty of receiving a ruling from the Service in connection
with the structuring of, an acquisition using an equity security
intended to reflect separately the performance of specific
businesses.
The Board of Directors determined that, on balance, the positive aspects of
the CarMax Stock Proposal outweigh any potentially adverse consequences and
concluded that the CarMax Stock Proposal is in the best interests of the Company
and its shareholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF THE CARMAX STOCK PROPOSAL
(INCLUDING THE AMENDMENTS TO THE ARTICLES THAT CONSTITUTE A PART THEREOF) IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY,
UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE CARMAX STOCK PROPOSAL.
DIVIDEND POLICY
The Board of Directors currently intends to pay dividends on the Circuit
City Stock at a quarterly rate of 3.5(cents) per share. With regard to the
CarMax Stock, the Board of Directors currently intends to retain future
earnings, if any, for the expansion of the business of the CarMax Group and does
not anticipate paying dividends on the CarMax Stock in the foreseeable future.
While the Board of Directors does not currently intend to change the
initial quarterly dividend rate or the dividend policies referred to above, it
reserves the right to do so at any time and from time to time. Under the CarMax
Stock Proposal and Virginia law, the Board of Directors would not be required to
pay dividends in accordance with the foregoing dividend policies.
In making its dividend decisions with respect to the Circuit City Stock and
the CarMax Stock, the Board of Directors will rely on the respective financial
statements of the Circuit City Group and the CarMax Group. See Annexes VI and
VII hereto for the historical financial statements of the Circuit City Group and
CarMax Group, respectively. The method of calculating earnings per share for the
Circuit City Stock and the CarMax Stock would reflect Circuit City Group
Earnings (Loss) or CarMax Group Earnings (Loss), as defined in the CarMax Stock
Proposal Amendments.
Subject to the limitations with respect to dividends on the Circuit City
Stock and the CarMax Stock described below under "Description of Circuit City
Stock and CarMax Stock -- Dividends," the Board of Directors would be able, in
its sole discretion, to declare and pay dividends exclusively on the Circuit
City Stock, exclusively on the CarMax Stock, or on both, in equal or unequal
amounts, notwithstanding the relative amounts of the Circuit City Group
Available Dividend Amount and the CarMax Group Available Dividend Amount, the
amount of prior dividends declared on each series, the respective voting or
liquidation rights of each series or any other factor.
CERTAIN MANAGEMENT AND ALLOCATION POLICIES
If the CarMax Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, the Company will prepare financial
statements in accordance with generally accepted accounting principles,
consistently applied, for both the Circuit City Group and the CarMax Group, and
these financial statements, taken together, would comprise all of the accounts
included in the corresponding consolidated financial statements of the Company.
The financial statements of each of the Groups principally reflect the financial
position, results of operations and cash flows of the businesses included
therein. Consistent with the CarMax Stock Proposal Amendments and relevant
policies, such Group financial statements also would include allocated portions
of the Company's corporate general and administrative costs and other shared
services. Notwithstanding such allocations for the purpose of preparing each of
the Group's financial statements, holders of Circuit City Stock and CarMax Stock
will continue to be subject to all of the risks associated with an investment in
the Company and all of its businesses, assets and liabilities. See "Risk
Factors -- Shareholders of One Company; Financial Effects on One Group Could
Affect the Other."
If the CarMax Stock Proposal is approved by shareholders and implemented by
the Board of Directors, principal corporate activities would be allocated to the
Groups based on methods that management of the Company believes to be reasonable
and would be reflected in their respective financial statements as follows:
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(i) Most financial activities will be managed by the Company on a
centralized basis. Such financial activities include the investment of
surplus cash, the issuance and repayment of short-term and long-term debt
and the issuance and repurchase of any Preferred Stock. In the event that
cash or other property allocated to one Group is transferred to the other
Group (other than transfers made with respect to the Inter-Group Interest
upon the payment of any dividend or other distribution on CarMax Stock),
such transfer would be accounted for in one of the following ways, as
determined by the Board of Directors: (A) as a reallocation of pooled debt
(as defined below) or Preferred Stock, as described in paragraph (ii)
below, (B) as a short-term or long-term loan from one Group to the other
Group, as described in paragraph (iii) below, (C) as an increase or
decrease in the Number of Shares Issuable with Respect to the Inter-Group
Interest, as described in paragraph (iv) below, or (D) as a sale of assets
between the two Groups. There are no specific criteria to determine which
of the foregoing would be applied to a particular transfer of cash or
property from one Group to the other Group. Such determination would be
made by the Board of Directors in the exercise of its business judgment
based upon all relevant circumstances, including the financing needs and
objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general
economic conditions. All transfers of material assets from one Group to the
other Group will be made on a fair value basis for the foregoing purposes,
as determined by the Board of Directors.
(ii) Debt of the Company is either allocated between the Groups
("pooled debt") or is allocated in its entirety to one Group. Preferred
Stock, if issued, would be allocated in a similar manner. Cash allocated to
one Group that is used to repay pooled debt or redeem Preferred Stock would
decrease such Group's allocated portion of the pooled debt or Preferred
Stock, respectively. Cash or other property allocated to one Group that is
transferred to the other Group would, if so determined by the Board of
Directors, decrease the transferring Group's allocated portion of the
pooled debt or Preferred Stock and, correspondingly, increase the recipient
Group's allocated portion of the pooled debt or Preferred Stock. The pooled
debt bears interest at a rate based on the weighted average interest rate
of such debt calculated on a periodic basis and applied to the average
pooled debt balance during the period. Preferred Stock, if issued and if
pooled in a manner similar to the pooled debt, would bear dividends at a
rate based on the weighted average dividend rate of such Preferred Stock
similarly calculated and applied. Any expense related to debt or Preferred
Stock of the Company that is allocated in its entirety to either Group
would be allocated in whole to such Group, and any expense related to
increases in pooled debt or Preferred Stock would be reflected in the
weighted average interest or dividend rate of such pooled debt or Preferred
Stock as a whole.
(iii) Cash or other property allocated to one Group that is
transferred to the other Group, could, if so determined by the Board of
Directors, be accounted for either as a short-term loan or as a long-term
loan. The Board of Directors would establish the terms on which loans
between the Groups would be made, including interest rate, amortization
schedule, maturity and redemption terms.
(iv) Cash or other property allocated to the Circuit City Group that
is contributed as additional equity to the CarMax Group would increase the
Number of Shares Issuable with Respect to the Inter-Group Interest and,
accordingly, would increase the Inter-Group Interest Fraction and decrease
the Outstanding CarMax Fraction. Cash or other property allocated to the
CarMax Group that is transferred to the Circuit City Group would, if so
determined by the Board of Directors, decrease the Number of Shares
Issuable with Respect to the Inter-Group Interest and, accordingly, would
decrease the Inter-Group Interest Fraction and increase the Outstanding
CarMax Fraction.
(v) For the periods prior to the CarMax Stock Offering, all financial
impacts of equity offerings have been reflected entirely in the financial
statements of the Circuit City Group. After the CarMax Stock Offering, all
financial impacts of issuances of additional shares of Circuit City Stock
or additional shares of CarMax Stock, the proceeds of which are attributed
to the Inter-Group Interest of the Circuit City Group, would be reflected
entirely in the financial statements of the Circuit City Group. All
financial impacts of issuances of additional shares of CarMax Stock, the
proceeds of which are allocated to the CarMax Group, would be reflected
entirely in the financial statements of the CarMax Group. Financial impacts
of dividends or other distributions on, and purchases of, shares of Circuit
City Stock or CarMax Stock would be reflected entirely in the respective
financial statements of the Circuit City Group and the CarMax Group, except
that so long as the Circuit City Group has an Inter-Group Interest, the
Circuit City Group financial statements would be credited, and the CarMax
Group financial statements would be charged, with an amount that is
proportionate to the aggregate amount paid in respect of any such dividend
on, or other distribution with respect to, the CarMax Stock.
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(vi) Corporate general and administrative costs and other shared
services are generally allocated to the Groups based upon utilization of
such services by each Group. Where determinations based on utilization
alone are impracticable, other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of the cost
attributable to each Group are used.
(vii) Federal income taxes, which are determined on a consolidated
basis, are allocated to each Group in accordance with the Company's tax
allocation policy and reflected in the financial statements for each Group.
In general, the consolidated tax provision and related tax payments or
refunds are allocated between the Groups, for Group financial statement
purposes, based principally upon the financial income, taxable income,
credits and other amounts directly related to the respective Group. Tax
benefits that cannot be used by the Group generating such attributes, but
can be utilized on a consolidated basis, are allocated to the Group that
generated such benefits. As a result, the allocated Group amounts of taxes
payable or refundable are not necessarily comparable to those that would
have resulted if the Groups had filed separate tax returns. State income
taxes generally are computed on a separate company basis.
The items discussed above have been reflected, to the extent applicable, in
each Group's financial statements and are discussed in Notes to the financial
statements of each Group.
The above policies may be modified or rescinded, or additional policies may
be adopted, in the sole discretion of the Board of Directors, without approval
of the shareholders, although the Board of Directors has no present plans to do
so. Any determination of the Board of Directors to modify or rescind such
policies, or to adopt additional policies, including any such decision that
would have disparate effects upon holders of the two series of Common Stock,
would be made by the Board of Directors in its good faith business judgment of
the Company's best interests, taking into consideration the interests of all
common shareholders. See "Risk Factors -- Fiduciary Duties of the Board of
Directors; No Definitive Precedent Under Virginia Law."
DESCRIPTION OF CIRCUIT CITY STOCK AND CARMAX STOCK
THE FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO THE GLOSSARY OF
DEFINED TERMS AND TO ANNEX II-A TO THIS PROXY STATEMENT, WHICH CONTAINS THE FULL
TEXT OF THE PROPOSED AMENDMENTS TO THE ARTICLES.
GENERAL
The Company's Articles currently provide that the Company is authorized to
issue 252,000,000 shares of stock, consisting of 250,000,000 shares of Common
Stock, par value $.50 per share, and 2,000,000 shares of Preferred Stock, par
value $20.00 per share, issuable in series by the Board of Directors, of which,
as of December 11, 1996, 500,000 shares were designated as Cumulative
Participating Preferred Stock, Series E (the "Series E Preferred Stock"). As of
December 11, 1996, the Company had issued and outstanding 97,953,294 shares of
Existing Common Stock and no shares of Preferred Stock.
If the CarMax Stock Proposal is adopted and implemented by the Board of
Directors, the Articles will be amended prior to the delivery of CarMax Stock in
the CarMax Stock Offering to provide for the issuance of Common Stock in series
by action of the Board of Directors, of which 125,000,000 shares initially will
be designated as Circuit City Stock and 125,000,000 shares initially will be
designated as CarMax Stock, and to redesignate the Existing Common Stock as
Circuit City Stock. The Circuit City Stock and the CarMax Stock are referred to
herein as the "Common Stock." The Board of Directors will have the authority to
increase or decrease from time to time the total number of authorized shares
comprising each series of Common Stock but not above a number which, when added
to the aggregate number of authorized shares of all other series of Common
Stock, would exceed the total authorized number of shares of Common Stock, and
not below the number of shares of such series then outstanding.
The Board of Directors is seeking shareholder approval of an amendment to
the Articles that would increase the number of shares of Common Stock authorized
for issuance from 250,000,000 to 350,000,000 in order to provide greater
assurance that a sufficient number of shares would be available in the event of
a conversion of one series of Common Stock into the other series. See "Proposal
2 -- Amendment to Articles of Incorporation Relating to Increased Authorization
of Common Stock" and " -- Conversion and Redemption."
The authorized but unissued shares of Circuit City Stock and CarMax Stock
would be available for issuance by the Company from time to time, as determined
by the Board of Directors, for any proper corporate purpose, which could include
raising capital, paying stock dividends, providing compensation or benefits to
employees or acquiring other companies or businesses. The approval of the
shareholders of the Company will not be solicited by the Company for the
issuance from the
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authorized but unissued shares of Common Stock of additional shares of Circuit
City Stock or CarMax Stock (including from shares that were previously
designated as part of the other series but are unissued) unless such approval is
deemed advisable by the Board of Directors or required by stock exchange
regulations or under the VSCA.
DIVIDENDS
Dividends on the Circuit City Stock and the CarMax Stock will be subject to
substantially the same limitations as dividends on the Existing Common Stock,
which are limited to legally available assets of the Company under the VSCA and
subject to the prior payment of dividends on any outstanding shares of Preferred
Stock. Under the VSCA, no distribution may be made to shareholders if, after
giving effect to such distribution, the Company would not be able to pay its
debts as they become due in the usual course of business or the Company's total
assets would be less than its total liabilities plus, subject to certain
exceptions, any amounts necessary to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those of
the shareholders receiving the distribution.
Dividends on the Circuit City Stock and the CarMax Stock will be further
limited to an amount not in excess of the Circuit City Group Available Dividend
Amount and the CarMax Group Available Dividend Amount, respectively. The
Available Dividend Amount with respect to a Group is intended to be similar to
the amount that would be legally available for the payment of dividends on the
stock of such Group under the VSCA if such Group were a separate company. There
can be no assurance that there will be an Available Dividend Amount with respect
to either Group.
The "Circuit City Group Available Dividend Amount," on any date, means the
excess, if any, of:
(i) an amount equal to the total assets of the Circuit City Group less
its total liabilities as of such date determined in accordance with
generally accepted accounting principles as in effect at such time applied
on a basis consistent with that applied in determining the Circuit City
Group Net Earnings (Loss), over
(ii) except to the extent that the Articles permit otherwise, the
amount that would be needed to satisfy the preferential rights to which
holders of Preferred Stock attributed to the Circuit City Group are
entitled upon dissolution of the Company;
provided that such excess must be reduced by an amount sufficient to ensure that
the Circuit City Group would be able to pay its debts as they become due in the
usual course of business.
The "CarMax Group Available Dividend Amount," on any date, means the
excess, if any, of:
(i) the product of (x) the Outstanding CarMax Fraction and (y) an
amount equal to the total assets of the CarMax Group less its total
liabilities as of such date determined in accordance with generally
accepted accounting principles as in effect at such time applied on a basis
consistent with that applied in determining the CarMax Group Net Earnings
(Loss), over
(ii) except to the extent that the Articles permit otherwise, the
amount that would be needed to satisfy the preferential rights to which
holders of any Preferred Stock attributed to the CarMax Group are entitled
upon dissolution of the Company;
provided that such excess must be reduced by an amount sufficient to ensure that
the CarMax Group would be able to pay its debts as they become due in the usual
course of business.
"Circuit City Group Net Earnings (Loss)," for any period through any date,
means the net earnings or loss of the Circuit City Group for such period (or in
respect of fiscal periods of the Company commencing prior to the date of the
initial issuance of CarMax Stock, the pro forma net earnings or loss of the
Circuit City Group for such period as if such date had been the first day of
such period) determined in accordance with generally accepted accounting
principles as in effect at such time, reflecting income and expense of the
Company attributed to the Circuit City Group on a basis substantially consistent
with attributions of income and expense made in the calculation of CarMax Group
Net Earnings (Loss), including, without limitation, corporate administrative
costs, net interest and other financial costs and income taxes.
"CarMax Group Net Earnings (Loss)," for any period through any date, means
the net earnings or loss of the CarMax Group for such period (or in respect of
the fiscal periods of the Company commencing prior to the date of the first
issuance of the CarMax Stock, the pro forma net earnings or loss of the CarMax
Group for such period as if such date had been the first day of such period)
determined in accordance with generally accepted accounting principles as in
effect at such time, reflecting income and expense of the Company attributed to
the CarMax Group on a basis substantially consistent with
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attributions of income and expense made in the calculation of the Circuit City
Group Net Earnings (Loss), including, without limitation, corporate
administrative costs, net interest and other financial costs and income taxes.
The VSCA limits the amount of distributions on capital stock to the legally
available assets of the Company, which are determined on the basis of the entire
Company, and not just the respective Groups. Consequently, the amount of legally
available assets would reflect the amount of any net losses of any Group, any
distributions on Circuit City Stock, CarMax Stock or any Preferred Stock and any
repurchases of Circuit City Stock, CarMax Stock or certain Preferred Stock.
Dividend payments on the Circuit City Stock and on the CarMax Stock could be
precluded because of the unavailability of legally available assets under the
VSCA, even though the Available Dividend Amount test with respect to the
relevant Group was met.
Subject to the prior payment of dividends on any outstanding shares of
Preferred Stock and the foregoing limitations, the Board of Directors would be
able, in its sole discretion, to declare and pay dividends exclusively on the
Circuit City Stock, exclusively on the CarMax Stock or on both, in equal or
unequal amounts, notwithstanding the relative amounts of the Circuit City Group
Available Dividend Amount and the CarMax Group Available Dividend Amount, the
amount of prior dividends declared on each series, the respective voting or
liquidation rights of each series or any other factor.
At the time of any dividend, redemption or other distribution on the
outstanding shares of CarMax Stock (but excluding a dividend payable in shares
of CarMax Stock), the Circuit City Group's financial statements will be credited
with, and the CarMax Group's financial statements will be charged with, an
amount equal to the product of (i) the Fair Value of such dividend, redemption
payment or distribution paid or distributed in respect of the outstanding shares
of CarMax Stock multiplied by (ii) a fraction, the numerator of which is the
Inter-Group Interest Fraction on the record date for such dividend, redemption
or distribution and the denominator of which is the Outstanding CarMax Fraction
on the record date for such dividend, redemption or distribution.
For information concerning the definition of "Fair Value," see "Glossary of
Defined Terms." See Annex I for illustrations of the calculation of the
Inter-Group Interest and the related effects of dividends on shares of CarMax
Stock.
CONVERSION AND REDEMPTION
The Articles currently do not provide for either mandatory or optional
conversion or redemption of the Existing Common Stock. The CarMax Stock Proposal
will permit the conversion and redemption of the CarMax Stock and the Circuit
City Stock upon the terms described below.
For information concerning the definitions of "Convertible Securities,"
"Market Capitalization," "Market Value," "Market Value Ratio of the CarMax Stock
to the Circuit City Stock," "Market Value Ratio of the Circuit City Stock to the
CarMax Stock" and "Publicly Traded," as used below, see "Glossary of Defined
Terms."
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF COMMON STOCK
Upon the sale, transfer, assignment or other disposition (whether by
merger, consolidation, sale or contribution of assets or stock or otherwise), in
one transaction or a series of related transactions (a "Disposition"), by the
Company of all or substantially all of the properties and assets attributed to
either Group to one or more persons or entities (other than (w) the Disposition
by the Company of all or substantially all of the Company's properties and
assets in one transaction or a series of related transactions in connection with
the liquidation, dissolution or termination of the Company and the distribution
of assets to shareholders, (x) on a pro rata basis to the holders of all
outstanding shares of the series of Common Stock relating to such Group and, in
the case of a Disposition of the properties and assets attributed to the CarMax
Group, to the Company for the benefit of the Circuit City Group with respect to
the Number of Shares Issuable with Respect to the Inter-Group Interest, if any,
(y) to any person or entity controlled by the Company (as determined by the
Board of Directors) or (z) in connection with a Related Business Transaction),
the Company is required, on or prior to the 85th Trading Day following the
consummation of such Disposition, to either:
(1) provided that there are assets of the Company legally available
therefor:
(i) subject to the limitations described above in the second paragraph
under " -- Dividends," declare and pay a dividend in cash and/or securities
(other than Common Stock) or other property to the holders of outstanding
shares of the series of Common Stock relating to the Group subject to such
Disposition having a Fair Value as of the date of such consummation equal
in the aggregate to (I) in the case of a Disposition of the properties and
assets attributed to the Circuit City Group, the Fair Value of the Net
Proceeds of such Disposition and (II) in the case of a Disposition of the
properties and assets attributed to the CarMax Group, the product of the
Outstanding CarMax Fraction as of the record
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date for determining holders entitled to receive such dividend multiplied
by the Fair Value of the Net Proceeds of such Disposition; or
(ii) (A) if such Disposition involves all (not merely substantially
all) of the properties and assets attributed to such Group, redeem all
outstanding shares of Common Stock relating to the Group subject to such
Disposition in exchange for cash and/or securities (other than Common
Stock) or other property having a Fair Value as of the date of such
consummation in the aggregate equal to (I) in the case of a Disposition of
the properties and assets attributed to the Circuit City Group, the Fair
Value of the Net Proceeds of such Disposition and (II) in the case of a
Disposition of the properties and assets attributed to the CarMax Group,
the product of the Outstanding CarMax Fraction as of such redemption date
multiplied by the Fair Value of the Net Proceeds of such Disposition; or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets attributed to such Group, redeem such number of
whole shares of the series of Common Stock relating to the Group subject to
such Disposition (but in any event not more than the number of shares of
such series of Common Stock outstanding) as have in the aggregate an
average Market Value, during the 10-Trading Day period beginning on the
16th Trading Day immediately succeeding such consummation, closest to (I)
in the case of a Disposition of the properties and assets attributed to the
Circuit City Group, the Fair Value of the Net Proceeds of such Disposition
as of the date of such consummation or (II) in the case of a Disposition of
the properties and assets attributed to the CarMax Group, the product of
the Outstanding CarMax Fraction as of the date such shares are selected for
redemption multiplied by the Fair Value of the Net Proceeds of such
Disposition as of the date of such consummation, in either case in
consideration for cash and/or securities (other than Common Stock) or other
property having a Fair Value in the aggregate equal to such Fair Value of
the Net Proceeds or such product, as applicable;
provided, however, that the Company may only redeem shares of a series of
Common Stock pursuant to this paragraph (ii) if the Fair Value of the Net
Proceeds to be paid in redemption of such series is less than or equal to
the Available Dividend Amount with respect to the Group subject to such
Disposition; or
(2) convert each outstanding share of the series of Common Stock relating
to the Group subject to such Disposition into a number of fully paid and
nonassessable shares of the series of Common Stock relating to the other
Group (or, if the Common Stock relating to the other Group is not Publicly
Traded at such time and shares of another class or series of common stock
of the Company (other than the series of Common Stock relating to the Group
subject to such Disposition) are then Publicly Traded, of such other class
or series of common stock as has the largest Market Capitalization as of
the close of business on the Trading Day immediately preceding the date of
the notice of such conversion mailed to holders), equal to 110% of the
ratio (rounded to the nearest five decimal places) of the average Market
Value of one share of Common Stock relating to the Group subject to such
Disposition to the average Market Value of one share of Common Stock
relating to the other Group (or such other class or series of common stock,
as the case may be), during the 10-Trading Day period beginning on the 16th
Trading Day following such consummation.
The Board of Directors may, within one year after a dividend or redemption
described above in this section, convert each outstanding share of the series of
Common Stock relating to the Group subject to such Disposition into a number of
fully paid and nonassessable shares of the series of Common Stock relating to
the other Group (or, if the series of Common Stock relating to the other Group
is not Publicly Traded at such time and shares of another class or series of
common stock of the Company (other than the series of Common Stock relating to
the Group subject to such Disposition) are then Publicly Traded, of such other
class or series of common stock as has the largest Market Capitalization as of
the close of business on the Trading Day immediately preceding the date of the
notice of such conversion mailed to holders) equal to 110% of the Market Value
Ratio of the Circuit City Stock to the CarMax Stock, if the Circuit City Stock
is to be converted into CarMax Stock, or the Market Value Ratio of the CarMax
Stock to the Circuit City Stock, if the CarMax Stock is to be converted into
Circuit City Stock, as of the fifth Trading Day prior to the date of the notice
of such conversion mailed to such holders. Any such exchange would dilute the
interest in the Company of holders of the series of Common Stock relating to the
Group not subject to the Disposition and would preclude holders of both series
of Common Stock from retaining their investment in a security reflecting
separately the business of their respective Group. In determining whether to
effect any such conversion following such a dividend or partial redemption, the
Board of Directors, in its sole discretion and consistent with its fiduciary
duties, in addition to other matters, would likely consider whether the
remaining properties and assets attributed to the Group subject to the
Disposition continue to constitute a viable business. Other considerations could
include the number of shares of Common Stock relating to such Group remaining
issued and outstanding, the per share market price of such Common Stock and the
cost of maintaining shareholder accounts.
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For these purposes, "substantially all of the properties and assets"
attributed to either Group means a portion of such properties and assets (i)
that represents at least 80% of the then Fair Value of the properties and assets
attributed to such Group or (ii) from which were derived at least 80% of the
aggregate revenues for the immediately preceding 12 fiscal quarterly periods of
the Company derived from the properties and assets of such Group as of such
date.
A "Related Business Transaction" means any Disposition of all or
substantially all of the properties and assets attributed to either Group in a
transaction or series of related transactions that result in the Company
receiving in consideration of such properties and assets primarily equity
securities (including, without limitation, capital stock, debt securities
convertible into or exchangeable for equity securities or interests in a general
or limited partnership or limited liability company, without regard to the
voting power or other management or governance rights associated therewith) of
any entity which (i) acquires such properties or assets or succeeds (by merger,
formation of a joint venture or otherwise) to the business conducted with such
properties or assets or controls such acquiror or successor and (ii) is
primarily engaged or proposes to engage primarily in one or more businesses
similar or complementary to the businesses conducted by such Group prior to such
Disposition, as determined by the Board of Directors. The purpose of the Related
Business Transaction exception is to enable the Company technically to "dispose"
of properties or assets of a Group to other entities engaged or proposing to
engage in businesses similar or complementary to those of the series of Common
Stock of such Group without resulting in a dividend on, or a conversion or
redemption of, the series of Common Stock of such Group.
The "Net Proceeds" of a Disposition of any of the properties and assets
attributed to either Group means, as of any date, an amount, if any, equal to
what remains of the gross proceeds of such Disposition after any payment of, or
reasonable provision is made as determined by the Board of Directors for, (a)
any taxes payable by the Company (or which would have been payable but for the
utilization of tax benefits attributable to the other Group) in respect of such
Disposition or in respect of any resulting dividend or redemption, (b) any
transaction costs, including, without limitation, any legal, investment banking
and accounting fees and expenses and (c) any liabilities (contingent or
otherwise) of or attributed to such Group, including, without limitation, any
liabilities for deferred taxes or any indemnity or guarantee obligations of the
Company incurred in connection with the Disposition or otherwise and any
liabilities for future purchase price adjustments and any preferential amounts
plus any accumulated and unpaid dividends in respect of the Preferred Stock
attributed to such Group.
The Company may elect to pay the dividend or redemption price referred to
in clause (1)(i) or (1)(ii) of the fifth preceding paragraph above either in the
same form as the proceeds of the Disposition were received or in any other
combination of cash, securities (other than Common Stock) or other property that
the Board of Directors or, in the case of equity securities or debt securities
that have not been Publicly Traded for a period of at least 15 months, an
independent investment banking firm, determines will have an aggregate market
value of not less than the amount of the Fair Value of the Net Proceeds.
At the time of any dividend or redemption made as a result of a Disposition
of the properties and assets attributed to the CarMax Group, the financial
statements of the Circuit City Group will be credited, and the financial
statements of the CarMax Group will be charged, with an amount equal to the
product of (i) the Fair Value of such dividend or redemption multiplied by (ii)
a fraction, the numerator of which is the Inter-Group Interest Fraction on the
record date for such dividend or redemption and the denominator of which is the
Outstanding CarMax Fraction on the record date for such dividend or redemption.
CONVERSION OF COMMON STOCK AT OPTION OF THE COMPANY
The Board of Directors may at any time convert each outstanding share of
Circuit City Stock into a number of fully paid and nonassessable shares of
CarMax Stock (or, if CarMax Stock is not Publicly Traded at such time and shares
of another class or series of common stock of the Company (other than Circuit
City Stock) are then Publicly Traded, of such other class or series of common
stock of the Company as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of such
conversion mailed to holders), equal to 115% of the Market Value Ratio of the
Circuit City Stock to the CarMax Stock as of the fifth Trading Day prior to the
date of the notice of such conversion mailed to such holders.
The Board of Directors may at any time convert each outstanding share of
CarMax Stock into a number of fully paid and nonassessable shares of Circuit
City Stock (or, if Circuit City Stock is not Publicly Traded at such time and
shares of another class or series of common stock of the Company (other than
CarMax Stock) are then Publicly Traded, of such other class or series of common
stock of the Company as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of such
conversion mailed to holders), equal to 115% of the Market Value Ratio of the
CarMax Stock to the Circuit City Stock as of the fifth Trading Day prior to the
date of the notice of such conversion mailed to such holders.
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The foregoing provisions allow the Company the flexibility to recapitalize
the Common Stock into one series of common stock that would, after such
recapitalization, represent an equity interest in all of the Company's
businesses. The optional exchange could be exercised at any future time if the
Board of Directors determined that, under the facts and circumstances then
existing, an equity structure consisting of two series of common stock was no
longer in the best interests of all of the Company's shareholders. Such exchange
may be exercised, however, at a time that is disadvantageous to the holders of
one of the series of Common Stock. See "Risk Factors -- Fiduciary Duties of the
Board of Directors; No Definitive Precedent under Virginia Law" and
" -- Potential Diverging Interests."
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
At any time at which all of the assets and liabilities attributed to the
Circuit City Group (and no other assets or liabilities of the Company or any
subsidiary thereof) are held directly or indirectly by one or more wholly owned
subsidiaries of the Company (the "Circuit City Group Subsidiaries"), the Board
of Directors may, provided that there are assets of the Company legally
available therefor, redeem all of the outstanding shares of Circuit City Stock
for all of the outstanding shares of the common stock of the Circuit City Group
Subsidiaries, on a pro rata basis. If at the time of any such redemption, the
Circuit City Group holds an Inter-Group Interest in the CarMax Group, the
Company will also issue a number of shares of CarMax Stock equal to the Number
of Shares Issuable with Respect to the Inter-Group Interest either to (i) the
holders of the Circuit City Stock or (ii) one or more of the Circuit City Group
Subsidiaries.
At any time at which all of the assets and liabilities attributed to the
CarMax Group (and no other assets or liabilities of the Company or any
subsidiary thereof) are held directly or indirectly by one or more wholly-owned
subsidiaries of the Company (the "CarMax Group Subsidiaries"), the Board of
Directors may, provided that there are assets of the Company legally available
therefor, redeem all of the outstanding shares of CarMax Stock for a number of
shares of common stock of the CarMax Group Subsidiaries equal to the product of
the Outstanding CarMax Fraction multiplied by the number of shares of the CarMax
Group Subsidiaries to be outstanding immediately following such redemption, on a
pro rata basis. The Company will retain or distribute the balance of the
outstanding shares of the common stock of the CarMax Group Subsidiaries in
respect of the Inter-Group Interest of the Circuit City Group in the CarMax
Group, if any.
GENERAL CONVERSION AND REDEMPTION PROVISIONS
Not later than the 10th Trading Day following the consummation of a
Disposition referred to above under
" -- Mandatory Dividend, Redemption or Conversion of Common Stock," the Company
will announce publicly by press release (i) the Net Proceeds of such
Disposition, (ii) the number of shares outstanding of the series of Common Stock
relating to the Group subject to such Disposition, (iii) the number of shares of
such Common Stock into or for which Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof and (iv) in the case of a Disposition of the properties and assets
attributable to the CarMax Group, the Outstanding CarMax Fraction on the date of
such notice. Not earlier than the 26th Trading Day and not later than the 30th
Trading Day following the consummation of such Disposition, the Company will
announce publicly by press release which of the actions specified in clause
(1)(i), (1)(ii)(A), (1)(ii)(B) or (2) of the first paragraph under
" -- Mandatory Dividend, Redemption or Conversion of Common Stock" it has
irrevocably determined to take.
If the Company determines to pay a dividend as described in clause (1)(i)
of such paragraph, the Company is required, not later than the 30th Trading Day
following the consummation of such Disposition, to cause to be given to each
holder of shares of the series of Common Stock relating to the Group subject to
such Disposition and to each holder of Convertible Securities convertible into
or exchangeable or exercisable for shares of such Common Stock (unless alternate
provision for notice to the holders of such Convertible Securities is made
pursuant to the terms of such Convertible Securities), a notice setting forth
(i) the record date for determining holders entitled to receive such dividend,
which shall be not earlier than the 40th Trading Day and not later than the 50th
Trading Day following the consummation of such Disposition, (ii) the anticipated
payment date of such dividend (which will not be more than 85 Trading Days
following the consummation of such Disposition), (iii) the type of property to
be paid as such dividend in respect of outstanding shares of such Common Stock,
(iv) the Net Proceeds of such Disposition, (v) in the case of a Disposition of
the properties and assets attributed to the CarMax Group, the Outstanding CarMax
Fraction on the date of such notice, (vi) the number of outstanding shares of
such Common Stock and the number of shares of such Common Stock into or for
which outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof and (vii) in
the case of notice to be given to holders of Convertible Securities, a statement
to the effect that a holder of such Convertible Securities will be entitled to
receive such dividend only if such holder properly converts, exchanges or
exercises them on or prior to the
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record date referred to in clause (i) of this sentence. Such notice will be sent
by first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(A) of the first paragraph under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company is required, not earlier than the 35th
Trading Day and not later than the 45th Trading Day prior to the redemption
date, to cause to be given to each holder of shares of the series of Common
Stock subject to the Disposition referred to in such paragraph, and to each
holder of Convertible Securities convertible into or exchangeable or exercisable
for shares of such Common Stock (unless alternate provision for such notice to
the holders of such Convertible Securities is made pursuant to the terms of such
Convertible Securities) a notice setting forth (1) a statement that all shares
of such Common Stock outstanding on the redemption date will be redeemed, (2)
the redemption date (which will not be more than 85 Trading Days following the
consummation of such Disposition), (3) the type of property in which the
redemption price for the shares to be redeemed is to be paid, (4) the Net
Proceeds of such Disposition, (5) in the case of a Disposition of the properties
and assets attributed to the CarMax Group, the Outstanding CarMax Fraction on
the date of such notice, (6) the place or places where certificates for shares
of such Common Stock, properly endorsed or assigned for transfer (unless the
Company waives such requirement) are to be surrendered for delivery of cash
and/or securities or other property, (7) the number of outstanding shares of
such Common Stock and the number of shares of such series of Common Stock into
or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, (8) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities will be entitled to participate in such redemption only if such
holder properly converts, exchanges or exercises such Convertible Securities on
or prior to the redemption date referred to in clause (2) of this sentence and a
statement as to what, if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or the Articles as then
amended if such holder thereafter converts, exchanges or exercises such
Convertible Securities and (9) a statement to the effect that, except as
otherwise provided below, dividends on such shares of such Common Stock shall
cease to be paid as of such redemption date. Such notice will be sent by
first-class mail, postage prepaid to each such holder at such holder's address
as the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(B) of the first paragraph under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company is required, not later than the 30th
Trading Day following consummation of the Disposition referred to in such
paragraph, to cause to be given to each holder of shares of the series of Common
Stock relating to the Group subject to such Disposition and to each holder of
Convertible Securities that are convertible into or exchangeable or exercisable
for shares of such Common Stock (unless alternate provision for such notice to
the holders of such Convertible Securities is made pursuant to the terms of such
Convertible Securities), a notice setting forth (i) a date, not earlier than the
40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition in respect of which such redemption is to be
made, on which shares of such series of Common Stock will be selected for
redemption, (ii) the anticipated redemption date which will not be more than 85
Trading Days following the consummation of such Disposition, (iii) the type of
property in which the redemption price for the shares to be redeemed is to be
paid, (iv) the Net Proceeds of such Disposition, (v) in the case of a
Disposition of the properties and assets attributed to the CarMax Group, the
Outstanding CarMax Fraction, (vi) the number of outstanding shares of such
Common Stock and the number of shares of such Common Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, (vii) in the
case of notice to be given to holders of Convertible Securities, a statement to
the effect that a holder of such Convertible Securities will be entitled to
participate in such selection for redemption only if such holder properly
converts, exchanges or exercises them on or prior to the date referred to in
clause (i) of this sentence and a statement as to what, if anything, such holder
will be entitled to receive pursuant to the terms of such Convertible Securities
or the Articles as then amended if such holder thereafter converts, exchanges or
exercises such Convertible Securities and (viii) a statement that the Company
will not be required to register a transfer of any shares of such series of
Common Stock for a period of 15 Trading Days next preceding the date referred to
in clause (i) of this sentence. Promptly, but not earlier than 40 Trading Days
nor more than 50 Trading Days following the consummation of such Disposition,
the Company is required to cause to be given to each holder of shares of such
Common Stock to be so redeemed a notice setting forth (1) the number of shares
of such Common Stock held by such holder to be redeemed, (2) a statement that
such shares of such Common Stock will be redeemed, (3) the redemption date, (4)
the kind and per share amount of cash and/or securities or other property to be
received by such holder with respect to each share of such Common Stock to be
redeemed, including details as to the calculation thereof, (5) the place or
places where certificates for shares of such Common Stock, properly endorsed or
assigned for transfer (unless the Company waives such requirement) are to be
surrendered for delivery of such cash and/or securities or other property, (6)
if applicable, a statement to the effect that the shares being redeemed may no
longer be transferred on the transfer books of the
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Company after the redemption date and (7) a statement to the effect that, except
as otherwise provided below, dividends on such shares of such Common Stock will
cease to be paid as of such redemption date. Such notices will be sent by
first-class mail, postage prepaid to each such holder, at such holder's address
as the same appears on the transfer books of the Company.
If less than all of the outstanding shares of such Common Stock are to be
redeemed as described above under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," such shares will be redeemed by the Company pro
rata among the holders of outstanding shares of such Common Stock or by such
other method as may be determined by the Board of Directors to be equitable.
In the event of any conversion as described above under " -- Conversion of
Common Stock at Option of the Company" or " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company will cause to be given, not earlier
than the 35th Trading Day and not later than the 45th Trading Day prior to the
consummation date, to each holder of shares of the series of Common Stock to be
so converted and to each holder of Convertible Securities that are convertible
into or exchangeable or exercisable for shares of such Common Stock (unless
alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such Convertible Securities), a
notice setting forth (i) a statement that all outstanding shares of such Common
Stock will be converted, (ii) the conversion date (which, in the case of a
conversion after a Disposition, will not be more than 85 Trading Days following
the consummation of such Disposition), (iii) the per share number of shares of
Circuit City Stock or CarMax Stock or other class or series of common stock of
the Company, as the case may be, to be received with respect to each share of
such Common Stock, including details as to the calculation thereof, (iv) the
place or places where certificates for shares of such Common Stock, properly
endorsed or assigned for transfer (unless the Company waives such requirement)
are to be surrendered for delivery of certificates for shares of such Common
Stock, (v) the number of outstanding shares of such Common Stock and the number
of shares of such Common Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof, (vi) a statement to the effect that, except
as otherwise provided below, dividends on such shares of such Common Stock will
cease to be paid as of such conversion date and (vii) in the case of notice to
be given to holders of Convertible Securities, a statement to the effect that a
holder of such Convertible Securities will be entitled to receive shares of such
Common Stock upon such conversion only if such holder properly converts,
exchanges or exercises such Convertible Securities on or prior to the conversion
date referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or the Articles as then amended if such holder thereafter
converts, exchanges or exercises such Convertible Securities. Such notice will
be sent by first-class mail, postage prepaid, to such holder at such holder's
address as the same appears on the transfer books of the Company.
If the Company determines to redeem shares of a series of Common Stock as
described above under " -- Redemption in Exchange for Stock of Subsidiary," the
Company will cause to be given to each holder of shares of such Common Stock and
to each holder of Convertible Securities convertible into or exchangeable or
exercisable for shares of such Common Stock (unless alternate provision for such
notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) a statement
that all shares of such Common Stock outstanding on the redemption date will be
redeemed in exchange for shares of common stock of the Circuit City Group
Subsidiaries (and, in the case of a redemption to which clause (i) of the second
sentence of the first paragraph under " -- Redemption in Exchange for Stock of a
Subsidiary" applies, CarMax Stock) or shares of common stock of the CarMax Group
Subsidiaries, as the case may be, (ii) the redemption date, (iii) if CarMax
Stock is being redeemed, the Outstanding CarMax Fraction on the date of such
notice, (iv) the place or places where certificates for shares of such Common
Stock properly endorsed or assigned for transfer (unless the Company waives such
requirement) are to be surrendered for delivery of certificates for shares of
common stock of the Circuit City Group Subsidiaries (and, in the case of a
redemption to which clause (i) of the second sentence of the first paragraph
under " -- Redemption in Exchange for Stock of a Subsidiary" applies, CarMax
Stock) or shares of common stock of the CarMax Group Subsidiaries, as the case
may be, (v) a statement to the effect that, except as otherwise provided below,
dividends on such shares of such Common Stock will cease to be paid as of such
redemption date, (vi) the outstanding number of shares of such Common Stock and
the number of shares of such Common Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof and (vii) in the case of notice
to be given to holders of Convertible Securities, a statement to the effect that
a holder of such Convertible Securities will be entitled to receive shares of
common stock of the Circuit City Group Subsidiaries (and, in the case of a
redemption to which clause (i) of the second sentence of the first paragraph
under " -- Redemption in Exchange for Stock of a Subsidiary" applies, CarMax
Stock) or shares of common stock of the CarMax Group Subsidiaries, as the case
may be, only if such holder properly converts, exchanges or exercises such
Convertible Securities on
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or prior to the date referred to in clause (ii) of this sentence and a statement
as to what, if anything, such holder will be entitled to receive pursuant to the
terms of such Convertible Securities or the Articles of Amendment if such holder
thereafter converts, exchanges or exercises such Convertible Securities. Such
notice will be sent by first-class mail, postage prepaid, not less than 30
Trading Days nor more than 45 Trading Days prior to the redemption date, to each
such holder at such holder's address as the same appears on the transfer books
of the Company.
Neither the failure to mail any notice described above to any particular
holder of shares of any series of Common Stock or of any Convertible Securities
nor any defect therein will affect the sufficiency thereof with respect to any
other holder of outstanding shares of such Common Stock or of outstanding
Convertible Securities, or the validity of any such conversion or redemption.
The Company will not be required to issue or deliver fractional shares of
any class or series of capital stock or any fractional securities to any holder
of either series of Common Stock upon any conversion, redemption, dividend or
other distribution described above. If more than one share of Common Stock is
held at the same time by the same holder, the Company may aggregate the number
of shares of any class or series of capital stock that is issuable or the amount
of securities or property that is distributable to such holder upon any such
conversion, redemption, dividend or other distribution (including any fractions
of shares or securities). If the number of shares of any class or series of
capital stock or the amount of securities remaining to be issued or distributed
to any holder of such Common Stock is a fraction, the Company will, if such
fraction is not issued or distributed to such holder, pay a cash adjustment in
respect of such fraction in an amount equal to the Fair Value of such fraction
on the fifth Trading Day prior to the date such payment is to be made (without
interest).
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of Common Stock; provided, however, that if such shares
are converted or redeemed by the Company after the record date for determining
holders of such Common Stock entitled to any dividend or distribution thereon,
such dividend or distribution will be payable to the holders of such shares at
the close of business on such record date notwithstanding such conversion or
redemption, in each case without interest.
Before any holder of Common Stock will be entitled to receive certificates
representing shares of any capital stock, cash and/or other securities or
property to be distributed to such holder with respect to any conversion or
redemption of shares of such Common Stock, such holder is required to surrender
at such place as the Company specified certificates for shares of such Common
Stock, properly endorsed or assigned for transfer (unless the Company waives
such requirement). As soon as practicable after the Company's receipt of
certificates for such shares of such Common Stock, the Company will deliver to
the person for whose account such shares were so surrendered, or to the nominee
or nominees of such person, certificates representing the number of whole shares
of the kind of capital stock, cash and/or other securities or property to which
such person was entitled, together with any fractional payment referred to
above, in each case without interest. If less than all of the shares of Common
Stock represented by any one certificate are to be redeemed, the Company will
issue and deliver a new certificate for the shares of such Common Stock not
redeemed.
From and after any conversion or redemption of shares of either series of
Common Stock, all rights of a holder of shares of such Common Stock that were
converted or redeemed will cease, except for the right, upon surrender of the
certificates representing such shares of such Common Stock, to receive the cash
and/or the certificates representing shares of the kind and amount of capital
stock and/or other securities or property for which such shares were converted
or redeemed, together with any fractional payment or rights to dividends as
provided above, in each case without interest. No holder of a certificate that
immediately prior to the conversion or redemption of Common Stock represented
shares of such Common Stock will be entitled to receive any dividend or other
distribution or interest payment with respect to shares of any kind of capital
stock into or in exchange for which shares of such Common Stock were converted
or redeemed until surrender of such holder's certificate in exchange for a
certificate or certificates representing shares of such kind of capital stock.
Upon such surrender, there will be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable with respect to a record date occurring after the conversion, but which
were not paid by reason of the foregoing, with respect to the number of whole
shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a conversion, the
Company will, however, be entitled to treat the certificates for such Common
Stock that have not yet been surrendered for conversion as evidencing the
ownership of the number of whole shares of the kind of capital stock for which
the shares of such Common Stock represented by such certificates should have
been converted, notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion or redemption of
shares of either series of Common Stock pursuant hereto. The Company will not,
however, be required to pay any tax that may be payable in
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respect of any transfer involved in the issue or delivery of any shares of
capital stock and/or other securities in a name other than that in which the
shares of such Common Stock so converted or redeemed were registered, and no
such issue or delivery will be made unless and until the person requesting such
issue has paid to the Company the amount of any such tax, or has established to
the satisfaction of the Company that such tax had been paid.
VOTING RIGHTS
Currently, holders of Existing Common Stock have one vote per share on all
matters submitted to shareholders. The CarMax Stock Proposal Amendments will
provide that the holders of both series of Common Stock and any series of
Preferred Stock outstanding at the time of such vote and entitled to vote
together with the holders of Common Stock will vote together as a single voting
group on all matters as to which common shareholders generally are entitled to
vote other than a matter with respect to 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 as to which both series of Common Stock would vote
together as a single voting group, (i) each outstanding share of Circuit City
Stock shall have one vote, and (ii) each outstanding share of CarMax Stock shall
have a number of votes (including a fraction of one vote) equal to the quotient
(rounded to the nearest three decimal places) of (A) the sum of (1) four times
the average Market Value of the CarMax Stock over the five-Trading Day period
ending on the 10th Trading Day prior to the record date for determining the
holders of Common Stock entitled to vote, (2) three times the average Market
Value of the CarMax Stock over the next preceding five-Trading Day period, (3)
two times the average Market Value of the CarMax Stock over the next preceding
five-Trading Day period and (4) the average Market Value of the CarMax Stock
over the next preceding five-Trading Day period, divided by (B) the sum of (1)
four times the average Market Value of the Circuit City Stock over the
five-Trading Day period ending on such 10th Trading Day, (2) three times the
average Market Value of the Circuit City Stock over the next preceding
five-Trading Day period, (3) two times the average Market Value of the Circuit
City Stock over the next preceding five-Trading Day period and (4) the average
Market Value of the Circuit City Stock over the next preceding five-Trading Day
period. 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.
To illustrate the foregoing, if the average Market Value of the CarMax
Stock for the periods specified in clause (A) above were $10, $20, $30 and $40,
respectively, and the average Market Value of the Circuit City Stock for the
periods specified in clause (B) above were $30, $40, $50 and $60, respectively,
each share of Circuit City Stock would have one vote and each share of CarMax
Stock would have 0.50 votes based on the following calculation:
(4x$10)+(3x$20)+(2x$30)+(1x$40)
-------------------------------
(4x$30)+(3x$40)+(2x$50)+(1x$60)
Based on such number of votes, on any proposal where both series of Common Stock
vote together as a single voting group (with no classes or series of Preferred
Stock, if any, entitled to vote together with the holders of Common Stock) and
assuming four times as many shares of Circuit City Stock as CarMax Stock are
issued and outstanding, the shares of Circuit City Stock and CarMax Stock would
represent approximately 89% and 11%, respectively, of the total voting power.
The Company anticipates that upon completion of the CarMax Stock Offering,
the Circuit City Stock will initially represent a substantial majority of the
voting power of all shares of Common Stock entitled to vote in the election of
directors.
If the CarMax Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, the Company will set forth the number of
outstanding shares of Circuit City Stock and CarMax Stock in its Annual and
Quarterly Reports filed pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and will disclose in any proxy statement for a
shareholder meeting the number of outstanding shares and per share voting rights
of the Circuit City Stock and the CarMax Stock.
The relative voting rights of the Circuit City Stock and the CarMax Stock
could fluctuate as described above so that a holder's voting rights will more
closely reflect the Market Value of such holder's equity investment in the
Company. Fluctuations in the relative voting rights of the Circuit City Stock
and the CarMax Stock could influence an investor interested in acquiring and
maintaining a fixed percentage of the voting power of the Company to acquire
such percentage of both series of Common Stock, and would limit the ability of
investors in one series to acquire for the same consideration relatively more or
less votes per share than investors in the other series.
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Following implementation of the CarMax Stock Proposal, the holders of
Circuit City Stock and CarMax Stock would vote together as a single voting
group, except as to certain mergers and statutory share exchanges and certain
amendments to the Articles affecting, among other things, the designation,
rights, preferences or limitations of either series of Common Stock, in which
case a separate vote by the holders of the particular series affected would also
be required. Accordingly, if a separate vote on a matter by the holders of
either the Circuit City Stock or CarMax Stock is not required under the VSCA and
if the Board of Directors does not require a separate vote, the series that is
entitled to more than the number of votes required to approve such matter will
be in a position to control the outcome of the vote on such matter even if the
matter involved a divergence or the appearance of a divergence of the interests
between the holders of the Circuit City Stock and the CarMax Stock. Conversely,
if a separate vote of the holders of either Circuit City Stock or CarMax Stock
is required to approve, for example, a merger of the type described above, the
favorable vote of the holders of more than two-thirds of the total number of
votes entitled to be cast with respect to each of the Circuit City Stock and
CarMax Stock may be required for approval. In such instance, the holders of
either the Circuit City Stock or CarMax Stock could prevent approval of such
merger notwithstanding the fact that the holders of more than two-thirds of the
total number of votes entitled to be cast with respect to both the Circuit City
Stock and CarMax Stock had voted in favor of it. Under the VSCA and the
Articles, (i) approval of certain matters, such as a merger, statutory share
exchange, and certain amendments to the Articles, requires the approval of the
holders of more than two-thirds of the total number of votes entitled to be cast
thereon by each voting group; (ii) approval of any other amendments to the
Articles requires the approval of the holders of a majority of the votes
entitled to be cast thereon by each voting group; and (iii) approval of most
other matters (other than the election of directors who are elected by a
plurality of the votes cast) requires the votes cast in favor of the matter to
exceed the votes cast opposing the matter. See "Risk Factors -- Limited Separate
Shareholder Voting Rights; Effects on Voting Power."
The CarMax Stock Proposal Amendments will reserve to the Board of Directors
the right to condition the submission of a particular matter on receipt of a
separate vote of the holders of outstanding shares of Circuit City Stock or
CarMax Stock. The Board of Directors has no present intention of imposing such a
separate vote requirement on any matter which it can now foresee. However,
should the Board of Directors, in the exercise of its fiduciary duties and its
good faith judgment of the best interests of the Company, conclude that such a
separate vote is necessary or desirable, it has reserved the right to so
require.
LIQUIDATION
Currently, in the event of a liquidation, dissolution or termination of the
Company, after payment, or provision for payment, of the debts and other
liabilities of the Company and the payment of full preferential amounts
(including any accumulated and unpaid dividends) to which the holders of any
Preferred Stock are entitled, holders of Existing Common Stock are entitled to
share ratably in the remaining net assets of the Company. Under the CarMax Stock
Proposal, in the event of a liquidation, dissolution or termination of the
Company, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the Company and full preferential
amounts (including any accumulated and unpaid dividends) to which holders of any
series of Preferred Stock are entitled (regardless of the Group to which such
shares of Preferred Stock were attributed), the holders of Circuit City Stock
and CarMax Stock will be entitled to receive the net assets, if any, of the
Company remaining for distribution to holders of Common Stock on a per share
basis in proportion to the Liquidation Units per share of each series. Each
share of Circuit City Stock will have one Liquidation Unit and each share of
CarMax Stock will have .5 of a Liquidation Unit. Thus, the liquidation rights of
the holders of the respective series may not bear any relationship to the
relative market values or the relative voting rights of the two series.
The Liquidation Units of the Circuit City Stock and the CarMax Stock were
determined by the Company in consultation with its financial advisors and are
based upon, among other factors, each Group's initial level of debt and equity
capitalization, each Group's recent historical financial performance, the market
prices of shares of comparable companies that are publicly traded and the
current state of the markets for public offerings and other stock transactions.
See "Risk Factors -- No Assurance as to Market Price." The Company considers
that its complete liquidation is a remote contingency, and its financial
advisors believe that, in general, these liquidation provisions are immaterial
to trading in Circuit City Stock and CarMax Stock. No holders of Circuit City
Stock will have any special right to receive specific assets attributable to the
Circuit City Group and no holder of CarMax Stock will have any special right to
receive specific assets attributable to the CarMax Group in the case of a
liquidation, dissolution or termination of the Company.
If the Company subdivides (by stock split, reclassification or otherwise)
or combines (by reverse stock split or otherwise) the outstanding shares of
either Circuit City Stock or CarMax Stock or declares a dividend or other
distribution of shares of Circuit City Stock or CarMax Stock to holders of such
series of Common Stock, the number of Liquidation Units of the Circuit City
Stock or the number of Liquidation Units of the CarMax Stock, will be
appropriately adjusted as determined by the Board of Directors so as to avoid
any dilution in aggregate liquidation rights of any series of Common Stock. For
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example, in case the Company were to effect a two-for-one split of the Circuit
City Stock, an adjustment would be made so that either the Circuit City Stock
would be entitled to 0.5 of a Liquidation Unit per share or the CarMax Stock
would be entitled to one Liquidation Unit per share, as determined by the Board
of Directors, in order to avoid dilution in the aggregate liquidation rights of
holders of CarMax Stock.
Neither a merger nor share exchange of the Company into or with any other
corporation, nor a merger or share exchange of any other corporation into or
with the Company, nor any sale, lease, exchange or other disposition of all or
any part of the assets of the Company, will, alone, be deemed to be a
liquidation of the Company, or cause the dissolution of the Company, for
purposes of the liquidation provisions set forth above.
DETERMINATIONS BY THE BOARD OF DIRECTORS
If the CarMax Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, any determinations made in good faith by
the Board of Directors under any provision described under "Description of
Circuit City Stock and CarMax Stock," and any determinations with respect to any
Group or the rights of holders of shares of either series of Common Stock, would
be final and binding on all shareholders of the Company, subject to the rights
of shareholders under applicable Virginia law and under the federal securities
laws.
PREEMPTIVE RIGHTS
Neither the holders of the Circuit City Stock nor the holders of the CarMax
Stock will have any preemptive rights or any rights to convert their shares into
any other securities of the Company.
INTER-GROUP INTEREST
The "Outstanding CarMax Fraction" means the percentage interest in the
CarMax Group represented at any time by the outstanding shares of CarMax Stock,
and the "Inter-Group Interest Fraction" means the remaining percentage interest
in the CarMax Group that is attributed to the Circuit City Group. The sum of the
Inter-Group Interest Fraction and the Outstanding CarMax Fraction will always
equal 100%. The "Number of Shares Issuable with Respect to the Inter-Group
Interest" means the number of shares of CarMax Stock that could be sold or
otherwise issued by the Company for the account of the Circuit City Group in
respect of the Inter-Group Interest. The Inter-Group Interest would not be
represented by actual shares of CarMax Stock and could not be voted by the
Circuit City Group.
The shares of CarMax Stock that the Company expects to issue in the CarMax
Stock Offering will be issued for the account of the CarMax Group. As a result,
immediately after the CarMax Stock Offering, the Outstanding CarMax Fraction is
expected to equal 15% to 20% and the Inter-Group Interest Fraction is expected
to equal 80% to 85%. If shares representing a greater percentage of the equity
value of the CarMax Group are sold in the CarMax Stock Offering, the Company
will identify the number of such additional shares that is issued for the
account of the Circuit City Group and the number of such additional shares that
is issued for the account of the CarMax Group. In each case, the Outstanding
CarMax Fraction would increase and the Inter-Group Interest Fraction would
decrease accordingly. The Number of Shares Issuable with Respect to the
Inter-Group Interest would be reduced as a result of the issuance of any such
additional shares for the account of the Circuit City Group and would be
unchanged as a result of the issuance of any such additional shares for the
account of the CarMax Group.
The Board of Directors has determined that 75,440,000 is the number of
shares of CarMax Stock that, if issued, would initially represent 100% of the
equity value of the CarMax Group. Such number was determined based on the
historical and projected financial and operating information of the CarMax
Group, the market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the CarMax
Group, prevailing equity market conditions and the desired range of the initial
public offering price of the CarMax Stock. The number of shares of CarMax Stock
representing 100% of the equity value of the CarMax Group would increase as a
result of the CarMax Stock Offering to the extent of the shares issued for the
account of the CarMax Group. For example, if 20% of the equity value of the
CarMax Group were issued in the CarMax Stock Offering, the 18,860,000 shares
representing such percentage and issued to the public would cause the number of
shares representing 100% of the equity value of the CarMax Group to increase to
94,300,000.
At the time of any additional sale of CarMax Stock, the Board of Directors
would, in its sole discretion, determine the allocation of the net proceeds of
such sale between the Circuit City Group and the CarMax Group. The Board of
Directors could allocate 100% of the net proceeds of a sale of CarMax Stock to
the Circuit City Group or to the CarMax Group, in which event the net proceeds
would be reflected entirely in the financial statements of the Group to which
such proceeds
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would be allocated. If the net proceeds of any sale of CarMax Stock were
allocated to the Circuit City Group in respect of its Inter-Group Interest, the
Number of Shares Issuable with Respect to the Inter-Group Interest would be
reduced, the Inter-Group Interest Fraction would accordingly also be reduced and
the Outstanding Interest Fraction would be proportionately increased. If the net
proceeds of any sale of CarMax Stock were allocated to the CarMax Group, the
Number of Shares Issuable with Respect to the Inter-Group Interest would not be
reduced, but the Inter-Group Interest Fraction would nonetheless be reduced, and
the Outstanding Interest Fraction would increase accordingly.
The Board of Directors reserves the right to issue shares of CarMax Stock
as a distribution on the Circuit City Stock, although it has no current
intention to do so. Such a distribution would be treated as a distribution of
shares issuable with respect to the Inter-Group Interest and, as a result, the
Number of Shares Issuable with Respect to the Inter-Group Interest would
decrease by the number of shares distributed to the holders of Circuit City
Stock, resulting in a reduction in the Inter-Group Interest Fraction and a
proportionate increase in the Outstanding CarMax Fraction.
If the Company repurchases shares of CarMax Stock with cash or property of
the Circuit City Group, the Number of Shares Issuable with Respect to the
Inter-Group Interest and the Inter-Group Interest Fraction would increase and
the Outstanding CarMax Fraction would decrease accordingly. If the repurchase of
shares of CarMax Stock were attributed to the CarMax Group, the Number of Shares
Issuable with Respect to the Inter-Group Interest would not change but the
Inter-Group Interest Fraction would nonetheless increase and the Outstanding
CarMax Fraction would decrease accordingly.
The foregoing determinations with respect to the allocation of issuances of
shares of CarMax Stock between the Groups and the choice of which Group's funds
are to be used to repurchase shares of CarMax Stock will be made by the Board of
Directors, in its discretion, after consideration of a number of factors,
including, among others, the relative levels of internally generated cash flow
of each Group, the long-term business prospects for each Group and the
availability and cost of alternative financing sources.
Cash or other property allocated to the Circuit City Group that is
contributed as additional equity to the CarMax Group would increase the Number
of Shares Issuable with Respect to the Inter-Group Interest (based on the then
current Market Value of shares of CarMax Stock), and, accordingly, would
increase the Inter-Group Interest Fraction and decrease the Outstanding CarMax
Fraction. Cash or other property allocated to the CarMax Group that is
transferred to the Circuit City Group would, if so determined by the Board of
Directors, decrease the Number of Shares Issuable with Respect to the
Inter-Group Interest (based on the then current Market Value of shares of CarMax
Stock) and, accordingly, would decrease the Inter-Group Interest Fraction and
increase the Outstanding CarMax Fraction. The Board of Directors could
determine, in its sole discretion, to make such contribution or transfer after
consideration of a number of factors, including, among others, the financing
needs and objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
The financial statements of the Circuit City Group will be credited, and
the financial statements of the CarMax Group will be charged with, an amount
equal to the product of (i) the Fair Value of any dividend, redemption payment
or other distribution paid or distributed in respect of the outstanding shares
of CarMax Stock (including any dividend of, or redemption payment made with, Net
Proceeds from a Disposition), times (ii) a fraction, the numerator of which is
the Inter-Group Interest Fraction on the record date for such dividend,
redemption payment or distribution and the denominator of which is the
Outstanding CarMax Fraction on the record date for such dividend, redemption
payment or distribution.
For further discussion and illustrations of the calculation of the
Inter-Group Interest Fraction, the Outstanding CarMax Fraction and the Number of
Shares Issuable with Respect to the Inter-Group Interest and the effects thereon
of dividends on, and issuances and repurchase of, shares of CarMax Stock, and
transfers of cash or other property between Groups, see Annex I hereto.
STOCK TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. will act as the registrar and transfer agent
for both the Circuit City Stock and the CarMax Stock.
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STOCK EXCHANGE LISTINGS
The NYSE has approved, subject to official notice of issuance, the
redesignation of the Existing Common Stock as Circuit City Stock which will
continue to trade under the symbol "CC." The NYSE also has approved, subject to
official notice of issuance, the listing of the CarMax Stock under the symbol
"KMX." The Company cannot predict to what extent a public market will develop
for the shares of the Circuit City Stock or the CarMax Stock or the prices at
which the shares of Circuit City Stock and the CarMax Stock may trade in such
market or otherwise. See "Risk Factors -- No Assurances as to Market Price."
NO DISSENTERS' RIGHTS
Under the VSCA, holders of shares of the Existing Common Stock will not
have dissenters' rights in connection with the CarMax Stock Proposal.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the federal income tax consequences of the CarMax
Stock Proposal and the Common Stock Redesignation is based on the opinion of
McGuire, Woods, Battle & Boothe, L.L.P., tax counsel to the Company. The
discussion is based on the Internal Revenue Code of 1986, as amended to the date
hereof (the "Code"), Treasury Department regulations, published positions of the
Service, and court decisions now in effect, all of which are subject to change.
In particular, Congress could enact legislation affecting the treatment of stock
with characteristics similar to the Circuit City Stock and the CarMax Stock or
the Treasury Department could promulgate regulations that change current law,
including regulations issued pursuant to its authority under section 337(d) of
the Code. Any future legislation or regulations could be enacted or promulgated
so as to apply retroactively to the CarMax Stock Proposal. However, upon advice
of counsel, the Company believes that, as a practical matter, it is unlikely
that such legislation or regulations would apply retroactively.
The Company has not applied for an advance tax ruling from the Service
because the Service has included the issuance of stock with characteristics
similar to the Circuit City Stock and CarMax Stock among the transactions upon
which it will not issue advance rulings.
TAX IMPLICATIONS TO THE SHAREHOLDERS
This discussion addresses only those shareholders who hold the Existing
Common Stock and would hold the Circuit City Stock as a capital asset within the
meaning of section 1221 of the Code and is included for general information
only. It does not discuss all aspects of federal income taxation that may be
relevant to a shareholder in light of that shareholder's particular tax
circumstances and does not apply to certain types of shareholders that may be
subject to special treatment under the federal income tax laws, including
without limitation, tax-exempt organizations, S corporations and other
pass-through entities, mutual funds, small business investment companies and
persons that hold their Existing Common Stock as part of a straddle, hedging or
conversion transaction. In addition, neither foreign, state or local tax
consequences nor estate and gift tax considerations are discussed. SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE
FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATION, AS WELL AS TO THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS TO WHICH THEY
MAY BE SUBJECT.
COMMON STOCK REDESIGNATION
In tax counsel's opinion, the Circuit City Stock will be common stock of
the Company for federal income tax purposes, and the shareholders will not
recognize income, gain or loss on the Common Stock Redesignation or as a result
of the amendment and restatement of the Rights Agreement described below (see
" -- Restated Rights Agreement"). The basis of the Existing Common Stock will be
carried over to the Circuit City Stock received pursuant to the Common Stock
Redesignation, and the holding period of the Circuit City Stock will include the
holding period of the Existing Common Stock, assuming that the Existing Common
Stock is a capital asset in the hands of the shareholder on the date on which
the Common Stock Redesignation becomes effective. If the Circuit City Stock were
instead treated as property other than stock of the Company, the Common Stock
Redesignation could result in the recognition of taxable gain or loss to the
shareholders based on the difference between the fair market value of the
Circuit City Stock received and the shareholder's tax basis in the Existing
Common Stock. Although it is possible that the Service might assert that Circuit
City Stock is not stock of the Company, it is the opinion of the Company's tax
counsel that the Service would not prevail in any such assertion.
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SALE OR EXCHANGE OF CIRCUIT CITY STOCK
Upon the taxable sale or exchange of the Circuit City Stock received
pursuant to the Common Stock Redesignation, a shareholder will recognize gain or
loss equal to the difference between (i) any cash received plus the fair market
value of any other consideration received, and (ii) the tax basis of the stock
sold or exchanged. Such basis will be determined as described under "Common
Stock Redesignation" above. Any gain or loss on the taxable sale or exchange of
the Circuit City Stock would be a capital gain or loss, assuming that such
Circuit City Stock was held as a capital asset by the shareholder on the date of
the sale or exchange.
The excess of net long-term capital gains over net short-term capital
losses could be taxed at a lower rate than ordinary income for certain
non-corporate taxpayers. A capital gain is long-term if the asset is held for
more than one year and is short-term if held for one year or less. The
distinction between capital gain or loss and ordinary income is also relevant
for other purposes under the Code, including the limitation on the deductibility
of capital losses.
Any conversion of Circuit City Stock into CarMax Stock or into any other
class of Common Stock of the Company upon the Company's exercise of its right to
do so should constitute a tax-free exchange to the exchanging shareholder. An
exchanging shareholder's tax basis and holding period in the converted Circuit
City Stock would be carried over to the Common Stock received in such tax-free
exchange.
UNITED STATES ALIEN HOLDERS
Dividend payments received by a United States Alien (as defined below)
holder of the Circuit City Stock generally will be subject to United States
federal withholding tax in the same manner as such holder is subject to federal
withholding tax on his or her Common Stock. A United States Alien holder will
not be subject to United States federal income or withholding tax on any gain
realized on the taxable sale or exchange of any such stock, unless (A) such gain
is effectively connected with a United States trade or business of the United
States Alien, (B) the United States Alien is an individual who was present in
the United States for a period or periods of 183 days or more during the taxable
year and certain other conditions are met, or (C) the stock sold or exchanged is
a "United States Real Property Interest" as defined in section 897(c)(1) of the
Code at any time during the five years prior to the sale or exchange of the
stock or at any time during the time that the United States Alien held such
stock, whichever time is shorter. The Circuit City Stock will be a United States
Real Property Interest only if, at any time during the five years prior to the
sale or exchange of such stock or at any time during the period that the United
States Alien held such stock, whichever time is shorter, the Company is a
"United States real property holding corporation" as defined in section
897(c)(2) of the Code and the United States Alien directly or constructively
owned more than 5% of the Circuit City Stock. The Company has determined that it
is not and has not been and does not believe that it will become a "United
States real property holding corporation" for federal income tax purposes.
A "United States Alien" is any person that, for United States federal
income tax purposes, is a foreign corporation, a nonresident alien individual, a
nonresident alien fiduciary or a foreign estate or trust, or a foreign
partnership that includes as a member any of the foregoing persons.
BACKUP WITHHOLDING
Certain noncorporate holders of the Circuit City Stock could be subject to
backup withholding at a rate of 31% on the payment of dividends on such stock.
Backup withholding will apply only if the holder (i) fails to furnish its
Taxpayer Identification Number ("TIN"), which, for an individual, would be his
or her Social Security number, (ii) furnishes an incorrect TIN, (iii) is
notified by the Service that it has failed to properly report payments of
interest or dividends or (iv) under certain circumstances, fails to certify
under penalties of perjury that it has furnished a correct TIN and has been
notified by the Service that it is subject to backup withholding for failure to
report payments of interest or dividends. Shareholders should consult their tax
advisors regarding their qualification for exemption from backup withholding and
the procedures for obtaining such an exemption if applicable.
The amount of any backup withholding from a payment to a holder of the
Circuit City Stock will be allowed as a credit against such shareholder's
federal income tax liability and may entitle such shareholder to a refund,
provided that the required information is furnished to the Service.
TAX IMPLICATIONS TO THE COMPANY
In the opinion of tax counsel, the Circuit City Stock and the CarMax Stock
will be common stock of the Company, and no gain or loss will be recognized by
the Company on either the CarMax Stock Proposal or the Common Stock
Redesignation. If either the Circuit City Stock or the CarMax Stock were treated
as property other than stock of the Company, the
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Company could recognize a significant taxable gain on the issuance of such stock
in an amount equal to the excess of the fair market value of such stock sold
over its tax basis in the hands of the Company. Furthermore, if the CarMax Stock
(or Circuit City Stock) were treated as stock of a subsidiary of the Company,
and not as common stock of the Company, depending upon the amount of stock
issued, the CarMax Group (or the Circuit City Group) would not be includable in
the Company's consolidated federal income tax return, and any dividends paid or
deemed to be paid to the Company by the CarMax Group (or by the Circuit City
Group) could be taxable to the Company, subject to any applicable dividends
received deduction. Although it is possible that the Service might assert that
CarMax Stock (or Circuit City Stock) is not stock of the Company, it is the
opinion of the Company's tax counsel that the Service would not prevail in any
such assertion.
RESTATED RIGHTS AGREEMENT
The Company has issued preferred stock purchase rights (the "Original
Rights") to all holders of the Existing Common Stock pursuant to a Rights
Agreement dated April 29, 1988 between the Company and Crestar Bank, as Rights
Agent, as amended and restated as of March 5, 1996 (the "Rights Agreement"). If
the CarMax Stock Proposal is approved by the shareholders and implemented by the
Board of Directors, (i) the Rights Agreement will be amended and restated (the
"Restated Rights Agreement") to reflect the change in the capital structure of
the Company, (ii) the Articles will be amended by action of the Board of
Directors to establish a new series of Preferred Stock (the "Series F Preferred
Stock"), (iii) the Board of Directors will authorize the issuance of one
preferred stock purchase right (a "CarMax Right") with respect to each share of
CarMax Stock that might be issued from time to time, including each such share
issued pursuant to the CarMax Stock Offering, and (iv) each Original Right will
be redesignated as a "Circuit City Right." The Circuit City Rights and the
CarMax Rights are collectively referred to herein as the "Rights."
The Restated Rights Agreement will provide that, prior to the earlier of
(i) the 10th day (the "Ownership Trigger Date") after a public announcement that
a person or group (including any affiliate or associate of such person or group)
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of shares of Common Stock representing 15% or more of the
total number of votes entitled to be cast generally in the election of directors
of all outstanding shares of Common Stock or (ii) the 10th business day after
the date of the commencement of or first public announcement of the intent of
any person or group to commence a tender or exchange offer the consummation of
which would result in such person or group becoming an Acquiring Person (the
earlier of such dates being called the "Distribution Date"), the Circuit City
Rights and the CarMax Rights will be evidenced by the certificates representing
shares of Circuit City Stock and CarMax Stock, respectively, then outstanding,
and no separate Rights certificates will be distributed. Therefore, until the
Distribution Date, the Circuit City Rights will be transferred with and only
with the Circuit City Stock, and the CarMax Rights will be transferred with and
only with the CarMax Stock. For purposes of the Restated Rights Agreement, the
total voting rights of the Common Stock will be determined based upon the fixed
voting rights of holders of outstanding shares of Circuit City Stock and CarMax
Stock in effect at the time of any such determination. See " -- Description of
Circuit City Stock and CarMax Stock -- Voting."
Upon the close of business on the Distribution Date, the Rights will
separate from the Common Stock and become exercisable as described below. The
Rights will expire on April 29, 1998 (the "Expiration Date"), unless earlier
redeemed by the Company as described below.
Following the Distribution Date, registered holders of Rights will be
entitled to purchase from the Company (i) in the case of a Circuit City Right,
one four-hundredth (1/400th) of a share of Series E Preferred Stock at a
purchase price of $35, subject to adjustment (the "Series E Purchase Price"),
and (ii) in the case of a CarMax Right, one four-hundredth (1/400th) of a share
of Series F Preferred Stock at a purchase price of $22, subject to adjustment
(the "Series F Purchase Price").
In the event (i) any person or group becomes an Acquiring Person other than
pursuant to a cash tender offer for all outstanding shares of Common Stock which
is determined to be fair by the Continuing Directors (i.e., those directors who
are such on the Distribution Date or are elected or nominated by a majority of
the Continuing Directors in office on the date of such election or nomination),
(ii) an Acquiring Person engages in one or more "self-dealing" transactions with
the Company as set forth in the Restated Rights Agreement, (iii) the Company is
the surviving or continuing corporation in a merger or other combination with an
Acquiring Person and all the Common Stock remains outstanding and is not changed
or exchanged or (iv) while there is an Acquiring Person, there shall be any
reclassification of securities, recapitalization of the Company or other
transaction or series of transactions that has the effect of increasing by more
than 1% the proportionate share of the outstanding shares of any class or series
of equity securities of the Company beneficially owned by the Acquiring Person,
then the Rights would "flip-in," and proper provision would be made so that each
holder of a Right, other than Rights which are, or under certain circumstances
specified in the Restated Rights Agreement, were beneficially owned by any
Acquiring
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Person (which will thereafter be void), will thereafter (a) in the case of a
Circuit City Right, entitle its holder to purchase, at the Series E Purchase
Price, a number of shares of Circuit City Stock with a market value equal to
twice the Series E Purchase Price and (b) in the case of a CarMax Right, entitle
its holder to purchase, at the Series F Purchase Price, a number of shares of
CarMax Stock with a market value equal to twice the Series F Purchase Price.
In the event, following the announcement that a person or group has become
an Acquiring Person, (i) the Company engages in a merger or consolidation with
another entity in which the Company is not the surviving corporation or in which
any shares of the outstanding Common Stock are changed into or exchanged for
stock or other securities of another person (or the Company) or cash or other
property or (ii) 50% or more of the Company's consolidated assets or earning
power are sold, the Rights would "flip-over," and each Circuit City Right and
each CarMax Right will entitle its holder to purchase, for the Series E Purchase
Price and Series F Purchase Price, respectively, a number of shares of common
stock of such entity or purchaser with a market value equal to twice the
applicable Purchase Price.
After any person or group becomes an Acquiring Person and before any
Acquiring Person becomes the beneficial owner of shares of Common Stock
representing 50% or more of the total number of votes entitled to be cast
generally in the election of directors of all outstanding shares of Common
Stock, the Company may, with the approval of a majority of the Continuing
Directors, exchange all or part of the Circuit City Rights and CarMax Rights for
shares of Circuit City Stock or CarMax Stock, respectively, or for shares of
Series E Preferred Stock or Series F Preferred Stock (or other preferred shares
having the same rights, privileges and preferences), respectively. In such
event, the exchange ratio would be one share of the applicable Common Stock, or
one four-hundredth (1/400th) of a share of the applicable series of Preferred
Stock, per Right.
At any time prior to the earlier of the Ownership Trigger Date or the
Expiration Date, the Company may, at its option, redeem all but not less than
all of the then outstanding Rights at a redemption price of $.0025 per Right
(the "Redemption Price"), provided, however, that any authorization of
redemption will require the concurrence of a majority of the Continuing
Directors if (i) any person or group has become an Acquiring Person or (ii)
there has been a change in a majority of the directors resulting from a proxy or
consent solicitation if any person participating in such solicitation has stated
(or the Board of Directors has determined in good faith) that such person
intends to take, or may consider taking, any action that would result in such
person becoming an Acquiring Person or that would cause the Rights to "flip-in"
or "flip-over." Immediately upon the action of the Board of Directors ordering
the redemption of the Rights, the Rights will terminate and the only right
thereafter of the holders of the Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
At any time prior to the Distribution Date, the Company may, without the
approval of any holders of Rights, supplement or amend any provision of the
Restated Rights Agreement, except that no supplement or amendment may be made
that changes the Redemption Price, the Expiration Date, the Purchase Prices or
the number of one four-hundredths of a share of Preferred Stock for which a
Right is exercisable (such provisions being referred to herein collectively as
the "Principal Economic Terms"). From and after the Distribution Date, the
Company may, without the approval of any holders of Rights, supplement or amend
the Restated Rights Agreement (i) to cure any ambiguity, (ii) to correct or
supplement any provision that may be defective or inconsistent, (iii) subject to
certain limitations and, in certain circumstances, only with the concurrence of
a majority of the Continuing Directors, to shorten or lengthen any time period
under the Restated Rights Agreement (other than a time period relating to when
the Rights may be redeemed if at the time of such supplement or amendment the
Rights are not then redeemable), or (iii) in any manner that the Company may
deem necessary or desirable and which does not adversely affect the interests of
the holders of Rights (other than an Acquiring Person) and which does not change
the Principal Economic Terms.
A copy of the form of the Restated Rights Agreement (which includes as
Exhibit B-1 the Form of Rights Certificate for Circuit City Rights and as
Exhibit B-2 the Form of Rights Certificate for CarMax Rights) will be filed with
the Commission as an Exhibit to the Registration Statement relating to the
CarMax Stock Proposal. A copy of the Rights Agreement previously has been filed
with the Commission as an Exhibit to a Registration Statement on Form 8-A, and
is incorporated herein by reference. A copy of the form of the Restated Rights
Agreement is available free of charge from the Company. This summary description
of the Rights does not purport to be complete and is qualified in its entirety
by reference to the form of the Restated Rights Agreement.
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ANTI-TAKEOVER CONSIDERATIONS
The following information is provided with respect to certain matters that
could be viewed as having the effect of discouraging an attempt to obtain
control of the Company.
The Articles currently provide for the issuance of Preferred Stock in
series at the discretion of the Board of Directors without further action by the
Company's shareholders (except as may be required by Virginia law or the rules
or regulations of any securities exchange on which the Company's securities may
then be listed). The Board of Directors may designate any of such series of
Preferred Stock and may establish the relative rights and preferences of each
series; however, no series of Preferred Stock may entitle the holder thereof to
more than one vote per share. The Articles authorize 2,000,000 shares of
Preferred Stock of which 1,000,000 shares have been or will be designated as
Series E or Series F Preferred Stock and 800,000 of those are or will be
reserved for issuance in connection with the Company's Restated Rights
Agreement. One of the effects of the existence of authorized, unissued and
unreserved Preferred Stock could be to enable the Board of Directors to issue
shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management. Such additional shares also could be
used to dilute the stock ownership of persons seeking to obtain control of the
Company. The Articles also provide for a classified Board of Directors under
which approximately one-third of the total number of directors are elected each
year. In addition, pursuant to the Bylaws, only the Chairman, the President or
the Board of Directors, and not the shareholders of the Company, are permitted
to call a special meeting of shareholders.
Certain of the Company's financing arrangements include provisions allowing
for the termination of such arrangements and the acceleration of the borrowings
and other obligations thereunder in the event (i) any person or group becomes,
or acquires the right to become, the beneficial owner of securities of the
Company representing 50% or more of the combined voting power of the Company's
outstanding voting securities or (ii) a transaction or series of transactions
occurs as a result of which the directors immediately prior to such
transaction(s) (together with persons elected or nominated by not less than two-
thirds of such directors) cease to constitute a majority of the Board of
Directors.
The Restated Rights Agreement will permit disinterested shareholders to
acquire additional shares of the Company or of an acquiring company at a
substantial discount in the event of certain described changes in control. See
" -- Restated Rights Agreement."
The Company is currently, and following the consummation of the CarMax
Stock Proposal will be, subject to the "affiliated transactions" and "control
share acquisitions" statutes of the VSCA, which are summarized below.
The "affiliated transactions" statute restricts certain transactions
("Affiliated Transactions") between a Virginia corporation having more than 300
shareholders of record and any person (an "Interested Shareholder") who
beneficially owns more than 10% of any class of the corporation's voting
securities. These restrictions, which are described below, do not apply to an
Affiliated Transaction with an Interested Shareholder who has been such
continuously since the date the corporation first had 300 shareholders of record
or whose acquisition of shares making such person an Interested Shareholder was
previously approved by a majority of the corporation's Disinterested Directors.
"Disinterested Director" means, with respect to a particular Interested
Shareholder, a member of the corporation's board of directors who was (i) a
member on the date on which an Interested Shareholder became an Interested
Shareholder or (ii) recommended for election by, or was elected to fill a
vacancy and received the affirmative vote of, a majority of the Disinterested
Directors then on the Board of Directors. Affiliated Transactions 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 an Interested Shareholder, or any reclassification, including
reverse stock splits, recapitalization or merger of the corporation with its
subsidiaries, which increases the percentage of voting shares owned beneficially
by an Interested Shareholder by more than 5%. The "affiliated transactions"
statute prohibits a corporation from engaging in an Affiliated Transaction with
an Interested Shareholder for a period of three years after the Interested
Shareholder became such unless the transaction is approved by the affirmative
vote of a majority of the Disinterested Directors and by the affirmative vote of
the holders of two-thirds of the voting shares other than those shares
beneficially owned by the Interested Shareholder. Following the three-year
period, in addition to any other vote required by law or by the corporation's
articles of incorporation, an Affiliated Transaction must be approved either by
a majority of the Disinterested Directors or by the shareholder vote described
in the preceding sentence unless the transaction satisfies the fair-price or
certain other provisions of the statute. These fair price provisions require, in
general, that the consideration to be received by shareholders in the Affiliated
Transaction (a) be in cash or in the form of consideration used by the
Interested Shareholder to acquire the largest number of its shares and (b) not
be less, on a per share basis, than an amount determined in the manner
48
<PAGE>
specified in the statute by reference to the highest price paid by the
Interested Shareholder for shares it acquired and the fair market value of the
shares on specified dates.
The "control share acquisitions" statute provides that shares of a Virginia
corporation having 300 or more shareholders of record which are acquired in a
"Control Share Acquisition" have no voting rights unless such rights are granted
by a shareholders' resolution approved by the holders of a majority of the votes
entitled to be cast on the election of directors by persons other than the
acquiring person or any officer or employee-director of the corporation. A
"Control Share Acquisition" is an acquisition of voting shares which, when added
to all other voting shares beneficially owned by the acquiring person, would
cause such person's voting strength with respect to the election of directors to
meet or exceed any of the following thresholds: (i) one-fifth, (ii) one-third or
(iii) a majority. An acquiring person is entitled, before or after a Control
Share Acquisition, to file a disclosure statement with the corporation and
demand a special meeting of shareholders to be called for the purpose of
considering whether to grant voting rights for the shares acquired or proposed
to be acquired. If authorized in the corporation's articles of incorporation or
bylaws before a Control Share Acquisition has occurred, the corporation may,
during specified periods, redeem the shares so acquired if no disclosure
statement is filed or if the shareholders have failed to grant voting rights to
such shares. In the event full voting rights are granted to an acquiring person
who then has majority voting power, those shareholders who did not vote in favor
of such grant are entitled to dissent and demand payment of the fair value of
their shares from the corporation. The control share acquisitions statute does
not apply to an actual or proposed Control Share Acquisition if the
corporation's articles of incorporation or bylaws are amended, within the time
limits specified in the statute, to so provide.
The Company's Bylaws establish advance notice procedures, as described
below, for shareholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of shareholders of
the Company.
The Bylaws provide that nominations for the election of directors may be
made only by the Board of Directors or by a shareholder entitled to vote in the
election of directors who gives timely written notice to the Secretary of the
Company. Any such notice must be given not later than (i) with respect to an
election to be held at an annual meeting of shareholders, 120 days in advance of
such meeting or (ii) 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 first given to shareholders. The
shareholder's notice must set forth (a) the name and address of the shareholder
who intends to make the nomination and of the person(s) to be nominated; (b) a
representation that the shareholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person(s) specified in the notice; (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person(s) (naming such person(s)) pursuant to which
the nomination(s) are to be made by the shareholder; (d) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Company if so elected.
The Bylaws also provide that in order to bring before an annual meeting of
shareholders any proper business that a shareholder has not sought to have
included in the Company's proxy statement for the meeting, a shareholder must
give timely written notice to the Secretary or Assistant Secretary of the
Company at the Company's principal office. Any such notice must be received (i)
on or after March 1st and before April 1st of the year in which the meeting will
be held, if clause (ii) is not applicable, or (ii) not less than 60 days before
the date of the meeting if the date for such meeting prescribed in the Bylaws
has been changed by more than 30 days. The shareholder's notice must set forth
(a) the name and address, as they appear on the Company's stock transfer books,
of the shareholder, (b) the class and number of shares of stock of the Company
beneficially owned by the shareholder, (c) 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, (d) 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 (e) any
interest that the shareholder may have in such business.
Certain provisions described above may have the effect of delaying
shareholder actions with respect to certain business combinations and the
election of new members of the Board of Directors. As such, the provisions could
have the effect of discouraging open market purchases of Common Stock because
they may be considered disadvantageous by a shareholder who desires to
participate in a business combination or elect a new director.
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PROPOSAL 2 -- AMENDMENT TO ARTICLES OF INCORPORATION
RELATING TO INCREASED AUTHORIZATION OF COMMON STOCK
The Board of Directors has unanimously approved, and recommends to the
shareholders that they adopt, an amendment to the Company's Articles, as set
forth in Annex II-B hereto, that would increase the number of shares of Common
Stock authorized for issuance from 250,000,000 to 350,000,000 in order to
provide greater assurance that a sufficient number of shares would be available
in the event of a conversion of one series of Common Stock into the other
series.
As described in "Proposal 1 -- The CarMax Stock Proposal -- Description of
Circuit City Stock and CarMax Stock -- Conversion and Redemption", any
conversion of one series of Common Stock into the other series would be at a
rate equal to either 110% or 115% of the ratio of the average Market Value of
one share of the series to be converted to the average Market Value of one share
of the other series, calculated over a specified period and, in certain cases,
on a time-weighted basis. The number of shares issuable in a conversion will
therefore vary based on the relative market values of the two series of Common
Stock and the number of outstanding shares of the series to be converted. Such a
conversion may occur at any time at the discretion of the Board of Directors or
following a Disposition of all or substantially all of the properties and assets
attributed to one of the Groups. In the event the Board of Directors determined
that a conversion was in the best interests of the Company, but insufficient
shares of authorized Common Stock were available, the Company would be unable to
effect such conversion without the delays associated with seeking approval of
shareholders to a further amendment to the Articles. The Board of Directors
believes that the proposed amendment is in the best interests of the Company and
its shareholders because of the uncertainty as to the number of shares that
would be issuable in the event of a conversion and to avoid possible delays
should a conversion be determined to be in the best interests of the Company,
taking into consideration the interests of all common shareholders.
If the proposed amendment is approved by shareholders and implemented by
the Board of Directors, the additional authorized shares of Common Stock would
be available for designation as Circuit City Stock or CarMax Stock and could be
issued by the Company from time to time, as determined by the Board of
Directors, for any proper corporate purpose, which could include raising
capital, paying stock dividends, providing compensation or benefits to employees
or acquiring other companies or businesses. The approval of the shareholders
will not be solicited by the Company for the issuance from the authorized but
unissued shares of Common Stock of such additional shares of Circuit City Stock
or CarMax Stock unless such approval is deemed advisable by the Board of
Directors or is required by stock exchange regulations or under the VSCA.
Other than as described above, the Company has no present understanding or
agreement with respect to the issuance for any purpose of any of the additional
shares that will be authorized for issuance if the Proposal is approved by the
shareholders. Although the Board of Directors has no present intention of doing
so, the additional shares of Common Stock that would be authorized for issuance
if the Proposal is approved could be issued in one or more transactions (within
limitations imposed by applicable law) that would make a takeover of the Company
more difficult and, therefore, less likely, even though such a takeover might be
economically beneficial to the Company and its shareholders. The Board of
Directors and management of the Company have no knowledge of any person or
entity that intends to seek a controlling interest in, or to make a takeover
proposal with respect to, the Company.
VOTE REQUIRED
Proposal 2 requires the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock. Proposal 2 relates to the proposed new
series of Common Stock to be created in connection with the CarMax Stock
Proposal and, therefore, is conditioned upon approval of Proposal 1 and will not
be implemented if Proposal 1 is not approved by shareholders and implemented by
the Board of Directors. Accordingly, a vote against Proposal 1 will have the
effect of a vote against Proposal 2.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF PROPOSAL 2 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY, UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSAL 2.
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<PAGE>
PROPOSAL 3 -- AMENDMENTS TO ARTICLES OF INCORPORATION
RELATING TO ISSUANCE OF PREFERRED STOCK IN SERIES
BY ACTION OF THE BOARD OF DIRECTORS AND
DELETION OF EXPIRED PROVISIONS
The Board of Directors has unanimously approved, and recommends to the
shareholders that they adopt, the Additional Amendments which would (i) revise
certain provisions of Article IV of the Articles to conform such provisions to
the current provisions of the VSCA and (ii) delete certain provisions of the
Articles that have expired or otherwise are no longer of any effect, as
described herein and set forth in Annex II-C hereto. The Company believes that
the Additional Amendments reflected in Proposal 3, if adopted, would not have
any substantive effect.
Article IV of the Articles provides that the Board of Directors may issue
Preferred Stock in one or more series and provide for the relative rights and
preferences of each series by resolution. Consistent with the VSCA as in effect
at the time these provisions were originally adopted, the Articles contemplate
that such resolutions of the Board of Directors will be set forth in Articles of
Serial Designation filed with the Virginia State Corporation Commission. The
proposed amendments to Section A of Article IV are intended to conform these
provisions to the current requirements of the VSCA that the designation of a
series of Preferred Stock and the rights and preferences thereof be set forth in
Articles of Amendment filed with the Virginia State Corporation Commission. The
proposed amendment to paragraph (e) of Section A(7) of Article IV of the
Articles also is intended to reflect that, in accordance with the VSCA as
currently in effect, shares of any series of the Preferred Stock which are
acquired by the Company will, as a matter of law, constitute authorized but
unissued shares of Preferred Stock undesignated as to series without any action
by the Board of Directors or any filing with the Virginia State Corporation
Commission.
Article VII of the Articles imposed certain limitations on "Business
Combinations" involving an "Interested Shareholder," as such terms are defined
therein. Pursuant to Section F thereof, the provisions of Article VII expired on
February 28, 1990. The Additional Amendments reflected in Proposal 3 would
delete Article VII in its entirety.
VOTE REQUIRED
Approval of Proposal 3 requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF PROPOSAL 3 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY, UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSAL 3.
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<PAGE>
PROPOSAL 4 -- AMENDMENTS TO 1994 STOCK INCENTIVE PLAN
GENERAL
The shareholders are being asked to consider and approve certain amendments
to the Company's 1994 Stock Incentive Plan (the "1994 Plan"), as described
herein and set forth in Annex III hereto. The 1994 Plan and two prior amendments
thereto were previously adopted by the Board of Directors and approved by
shareholders. On December 9, 1996, the Board of Directors approved the
amendments to the 1994 Plan reflected in this Proposal 4, subject to approval of
this Proposal by shareholders as well as approval by shareholders and subsequent
implementation by the Board of Directors of the CarMax Stock Proposal. The
descriptions of the 1994 Plan and the proposed amendments thereto are qualified
in their entirety by reference to the text of the 1994 Plan, as it is proposed
to be amended, set forth in Annex III.
AMENDMENTS TO 1994 PLAN
If the CarMax Stock Proposal is adopted and implemented by the Board of
Directors, it is proposed that the 1994 Plan be amended as of the effective date
of the Common Stock Redesignation to (i) clarify that grants made after such
date may be made with respect to either Circuit City Stock or CarMax Stock, or
both, in the same manner and to the same extent as permitted with respect to the
Existing Common Stock, (ii) reserve 5,700,000 shares of CarMax Stock for
issuance pursuant to awards made under the 1994 Plan and (iii) permit options
outstanding under an existing CarMax Group stock option plan to be converted
into options to acquire shares of CarMax Stock. The Company believes it is
desirable to maintain its flexibility to use option grants to attract, retain
and reward exceptional personnel. In this regard, the Company believes that, if
CarMax Stock is issued by the Company, options for CarMax Stock will provide a
more effective and direct incentive for employees of the CarMax Group than
options for Circuit City Stock.
The Board of Directors has concluded that the amendments to the 1994 Plan
are appropriate to reflect the change in the equity structure of the Company.
The 1994 Plan provisions authorizing awards as well as adjustments to shares
reserved and outstanding awards implicitly permit the use of more than one
series of voting Common Stock for awards under the 1994 Plan. Nevertheless, the
Board of Directors believes that it is desirable to amend the 1994 Plan to
provide explicitly that shares of both Circuit City Stock and CarMax Stock are
available for awards. Outstanding awards under the 1994 Plan will be adjusted to
reflect the CarMax Stock Proposal in accordance with the adjustment provision of
the 1994 Plan. It is anticipated that upon the Common Stock Redesignation,
outstanding options to purchase shares of Existing Common Stock will be
converted into options to purchase the same number of shares of Circuit City
Stock. The per share exercise price for the shares subject to currently existing
options for Existing Common Stock would continue to be the per share exercise
price of the options following such conversion. Corresponding adjustments would
be made to any related stock appreciation rights payable in the event of a
change of control. Shares of restricted stock previously awarded under the 1994
Plan will be redesignated in the same manner as the Existing Common Stock.
The CarMax Group currently has its own stock option plan for employees. The
proposed amendments to the 1994 Plan would permit the Company to convert options
outstanding under such plan into options to acquire shares of CarMax Stock. It
is the Company's intent that, if the CarMax Stock Proposal is approved by
shareholders and implemented by the Board of Directors, the interests of
employee participants in the CarMax Group's existing stock option plan will be
converted into options under the 1994 Plan to acquire shares of CarMax Stock.
See " -- 1994 Plan Benefits Table."
The proceeds from the issuance of shares of CarMax Stock upon the exercise
of awards under the 1994 Plan (including those granted pursuant to the
conversion of options currently outstanding under the CarMax Group's stock
option plan) would be allocated to the CarMax Group. Upon such issuance, the
Inter-Group Interest Fraction would be decreased, the Outstanding CarMax
Fraction would be increased and the Number of Shares Issuable with Respect to
the Inter-Group Interest would remain unchanged. The proceeds from the issuance
of shares of Circuit City Stock upon the exercise of awards under the 1994 Plan
would be allocated to the Circuit City Group.
DESCRIPTION OF 1994 PLAN AS PROPOSED TO BE AMENDED
The 1994 Plan authorizes incentive awards in the form of stock options,
stock appreciation rights or restricted stock. All present and future employees
of the Company are eligible to receive incentive awards under the 1994 Plan. No
more than 1,500,000 shares of Common Stock may be allocated to awards granted to
any employee during any single calendar year.
The number of shares of Common Stock reserved for grant under the 1994 Plan
is 5,500,000 shares of Circuit City Stock and 5,700,000 shares of CarMax Stock.
In addition, shares of Circuit City Stock that have not been issued and shares
allocated to options or portions thereof that expire or otherwise terminate
unexercised under the Company's 1986 Stock
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<PAGE>
Incentive Plan and 1988 Stock Incentive Plan may be subjected to an award under
the 1994 Plan. Any shares of a series of Common Stock (i) that have not been
issued under the 1994 Plan and that are allocable to awards or portions thereof
that expire or otherwise terminate unexercised, (ii) that are restricted stock
and are reacquired by the Company as a result of a forfeiture of such shares
pursuant to the 1994 Plan, or (iii) that are surrendered by an optionee or
retained by the Company in payment of federal and state income tax withholding
liabilities upon exercise of an option again, in each case, may be subjected to
an award under the 1994 Plan relating to shares of such series. The number of
shares of each series of Common Stock available for issuance pursuant to the
1994 Plan and the terms of outstanding awards are subject to adjustment by the
Committee in the event of a stock dividend, stock split, subdivision or
consolidation of shares or other similar changes in the capitilization of the
Company.
The Compensation and Personnel Committee of the Board of Directors (the
"Committee") administers the 1994 Plan and has the complete discretion 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
1994 Plan and may impose such other restrictions and requirements as it may deem
appropriate.
Options to purchase shares of Common Stock granted under the 1994 Plan may
be "incentive stock options" or nonstatutory stock options. The option price of
Common Stock 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
Common Stock on the date of the option grant. The value of incentive stock
options, based on the exercise price, that can be exercisable for the first time
in any calendar year is limited to $100,000.
Options may only be exercised at such times as specified by the Committee,
provided, however, that incentive stock options may be exercised only within the
periods permitted by the Internal Revenue Code. No option may be exercised by a
person subject to section 16(b) of the Exchange Act within the first six months
from the date it is granted (except in the case of an optionee who becomes
disabled or dies or in the case of an option that becomes exercisable as a
result of a change of control).
If the option so provides, an optionee exercising an option may pay the
purchase price in cash; by causing shares of Common Stock to be withheld from
the option shares; by delivering shares of the same series of Common Stock as
the shares to which the option relates; by delivering a promissory note; or by
delivering an exercise notice together with irrevocable instructions to a broker
to promptly deliver to the Company the amount of sale or loan proceeds from the
option shares to pay the exercise price. The 1994 Plan authorizes the Committee
to include a "reload" feature in options granted under the 1994 Plan.
The Committee may award stock appreciation rights under the 1994 Plan
either with or without related options. When the stock appreciation right is
exercisable, the holder may surrender to the Company 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
Common Stock covered by the surrendered portion of the stock appreciation right
and (ii) the exercise price of the Common Stock under the related option or, if
not related to an option, the fair market value of such Common Stock on the date
the stock appreciation right was awarded. The Company's obligation arising upon
exercise of a stock appreciation right may be paid in the series of Common Stock
to which the right relates or in cash, or in any combination of the two, as the
Committee may determine.
Restricted stock issued pursuant to the 1994 Plan 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 1994 Plan, and (ii) if a holder of
restricted stock ceases to be employed by the Company, any shares of restricted
stock on which the restrictions have not lapsed or been otherwise removed will
be forfeited. The Committee may impose further restrictions on restricted stock
awards, including additional events of forfeiture.
Unless otherwise provided in the terms of the award, no options or stock
appreciation rights and no shares of restricted stock (during the applicable
period of restriction) may be sold, transferred, pledged, or otherwise disposed
of, other than by will or by the laws of descent and distribution and all rights
granted to a participant under the 1994 Plan shall be exercisable during his or
her lifetime only by such participant, or his or her guardians or legal
representatives. Upon the death of a participant, his or her personal
representative or beneficiary may exercise the rights under the 1994 Plan.
The Board of Directors may amend the 1994 Plan in such respects as it deems
advisable provided that if and to the extent required by the Internal Revenue
Code, no change will be made that increases the total number of shares of Common
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Stock reserved for issuance under the 1994 Plan, expands the class of persons
eligible to receive awards or materially increases the benefits accruing to
participants under the 1994 Plan, unless such change is approved by the
shareholders of the Company.
FEDERAL INCOME TAX CONSEQUENCES
An employee does not incur federal income tax when granted a nonstatutory
stock option, an incentive stock option, a stock appreciation right or
restricted stock.
Upon exercise of a nonstatutory option or a stock appreciation right, an
employee generally will recognize ordinary compensation income, which is subject
to income tax withholding by the Company, equal to the difference between the
fair market value of the Common Stock on the date of the exercise and the option
price. When an employee exercises an incentive stock option, the employee
generally will not recognize income, unless the employee is subject to the
alternative minimum tax.
An employee may deliver shares of Common Stock instead of cash to acquire
shares under an incentive stock option or nonstatutory stock option without
having to recognize taxable gain (except in some cases with respect to
"statutory option stock") on any appreciation in value of the shares delivered.
"Statutory option stock" is stock acquired upon the exercise of incentive stock
options.
In general, an employee 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. Such amount will be included in income in the tax year in
which such event occurs.
The Committee has authority under the 1994 Plan to adopt procedures to give
a participant the right to deliver already owned shares of the same series of
Common Stock as the shares to which the award relates or to have a portion of
the shares that would otherwise be acquired under an award withheld to cover tax
liabilities. An employee will recognize taxable gain or loss on the already
owned shares delivered to cover tax liabilities as if the shares had been sold
for their fair market value.
The Company usually will be entitled to a business expense deduction at the
time and in the amount that the recipient of an incentive award recognizes
ordinary compensation income in connection therewith. No deduction is allowed in
connection with an incentive stock option, unless the employee disposes of
Common Stock received upon exercise in violation of the holding period
requirements. Moreover, there can be circumstances when the Company may not be
entitled to a deduction for certain transfers of Common Stock or payments to an
employee upon the exercise of an incentive award that has been accelerated as a
result of a change of control. This summary of federal income tax consequences
of incentive awards granted under the 1994 Plan does not purport to be complete.
State, local and foreign income taxes also may be applicable to the transactions
described above.
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1994 PLAN BENEFITS TABLE
The following table shows the amount and aggregate exercise price of CarMax
Stock options that would be received by the persons and groups specified below
upon approval and implementation of the CarMax Stock Proposal and conversion of
the options currently outstanding under the CarMax Group's stock incentive plan.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CARMAX
STOCK UNDERLYING OPTIONS TO BE AGGREGATE
NAME AND POSITION RECEIVED UPON CONVERSION EXERCISE PRICE ($)
- ----------------------------------------------------------- ------------------------------ ------------------
<S> <C> <C>
Richard L. Sharp
Chairman of the Board,
President and Chief
Executive Officer 0 --
Richard S. Birnbaum
Executive Vice President
Operations 0 --
John A. Fitzsimmons
Senior Vice President
Administration 0 --
Michael T. Chalifoux
Senior Vice President
Chief Financial Officer
and Secretary 0 --
W. Alan McCollough
Senior Vice President
Merchandising 0 --
Executive Officer Group 800,000 175,000
Non-Executive Officer
Employee Group 3,981,808 2,269,113
</TABLE>
VOTE REQUIRED
Proposal 4 will be approved if the votes cast in favor of the Proposal
exceed the votes cast opposing the Proposal. Proposal 4 relates to the proposed
new series of Common Stock to be created in connection with the CarMax Stock
Proposal and, therefore, is conditioned upon approval of Proposal 1 and will not
be implemented if Proposal 1 is not approved by shareholders and implemented by
the Board of Directors. Accordingly, a vote against Proposal 1 will have the
effect of a vote against Proposal 4.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF PROPOSAL 4 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY, UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSAL 4.
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PROPOSAL 5 -- AMENDMENTS TO ANNUAL PERFORMANCE BASED BONUS PLAN
GENERAL
The shareholders are being asked to consider and approve certain amendments
to the Company's Annual Performance Based Bonus Plan (the "Bonus Plan"), as
described herein and set forth in Annex IV hereto. The Bonus Plan was previously
adopted by the Board of Directors and approved by shareholders. The purpose of
the Bonus Plan is to provide an annual performance based cash incentive for
executive officers who are in a position to contribute materially to the success
of the Company and its subsidiaries. The Bonus Plan is administered by the
Committee. On December 9, 1996, the Board of Directors approved the amendments
to the Bonus Plan reflected in this Proposal 5, subject to approval of this
Proposal by shareholders as well as approval by shareholders and subsequent
implementation by the Board of Directors of the CarMax Stock Proposal. The
descriptions of the Bonus Plan and the proposed amendments thereto are qualified
in their entirety by reference to the text of the Bonus Plan, as it is proposed
to be amended, set forth in Annex IV.
AMENDMENTS TO BONUS PLAN
Under the Bonus Plan, the Committee selects the performance criteria to be
used for each fiscal year of the Company that the Bonus Plan is in effect (a
"Plan Year"). The Bonus Plan currently defines "performance criteria" as the
Company's pre-tax earnings and earnings per share. The proposed amendments to
the Bonus Plan would modify the definition of performance criteria to include
pre-tax earnings and earnings per share of each of the Circuit City Group and
the CarMax Group.
The Board of Directors has concluded that the proposed amendments to the
Bonus Plan are appropriate to reflect the change in the equity structure of the
Company. Under the proposal, the Committee would have the flexibility to
structure awards that provide a more effective and direct incentive for various
employees by basing such awards on the performance of either Group, the
performance of the Company or any combination thereof. If the CarMax Stock
Proposal is approved by shareholders and implemented by the Board of Directors,
existing awards under the Bonus Plan that are based on earnings per share of the
Company will be determined based on earnings per share of the Circuit City Stock
and existing awards that are based on pre-tax earnings of the Company will be
determined based on pre-tax earnings of the Circuit City Group.
DESCRIPTION OF BONUS PLAN AS PROPOSED TO BE AMENDED
All executive officers of the Company are eligible under the Bonus Plan.
The Committee selects which executive officers will be participants each Plan
Year and the terms and conditions of annual awards to participants.
Approximately nine employees are currently eligible to participate in the Bonus
Plan.
For each Plan Year, the Committee selects the performance criteria to be
used for that Plan Year. The permissible performance criteria under the Bonus
Plan are the pre-tax earnings and earnings per share for each of the Company,
the Circuit City Group and the CarMax Group. For purposes of the performance
criteria, the "Company" refers to the Company and its subsidiaries on a
consolidated basis and earnings per share of the Company are calculated on a
combined basis for all series of the Common Stock in accordance with objective
procedures to be established by the Committee. Any or all of the performance
criteria may be used for a Plan Year. The Committee also determines the
appropriate weight to be given to any applicable performance criteria for a Plan
Year. For each performance criterion, the Committee establishes 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 establishes 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 also establishes a target bonus for each participant for each
Plan Year. After the end of a Plan Year, the Committee certifies in writing the
level of performance goal that was attained for the prior Plan Year. A
participant's bonus under the Bonus Plan is 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 is 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.
The Bonus Plan will terminate on February 29, 2004, unless it is terminated
earlier by the Board of Directors. The Board of Directors 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 the Company (except for amendments necessary to meet the
requirements of Section 162(m) of the Internal Revenue Code).
56
<PAGE>
VOTE REQUIRED
Proposal 5 will be approved if the votes cast in favor of the Proposal
exceed the votes cast opposing the Proposal. Proposal 5 relates to the proposed
new series of Common Stock to be created in connection with the CarMax Stock
Proposal and, therefore, is conditioned upon approval of Proposal 1 and will not
be implemented if Proposal 1 is not approved by shareholders and implemented by
the Board of Directors. Accordingly, a vote against Proposal 1 will have the
effect of a vote against Proposal 5.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT ADOPTION OF PROPOSAL 5 IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND, ACCORDINGLY, UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSAL 5.
57
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below sets forth for the years ended February 29, 1996, February
28, 1995, and February 28, 1994, the annual and long-term compensation for
services in all capacities to the Company and its subsidiaries of those persons
who at February 29, 1996, were the Company's Chief Executive Officer ("CEO") and
the other four most highly compensated executive officers of the Company other
than the CEO. The only stock appreciation rights ("SARs") granted were Change of
Control SARs, which were granted in connection with each of the options. No
free-standing SARs have been granted.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND FISCAL SALARY BONUS OPTIONS/SARS
PRINCIPAL POSITION YEAR $ $ (#)
- --------------------------- ------ ------- ------- ------------
<S> <C> <C> <C> <C>
Richard L. Sharp 1996 685,509 376,750 127,000
Chairman of the Board, 1995 651,747 975,000 125,000
President and Chief 1994 618,286 549,575 97,500
Executive Officer
Richard S. Birnbaum 1996 503,355 137,500 45,000
Executive Vice President 1995 482,322 356,250 50,000
Operations 1994 330,105 101,238 20,000
John A. Fitzsimmons 1996 468,356 89,513 30,000
Senior Vice President 1995 441,045 231,000 30,000
Administration 1994 407,863 126,157 22,500
Michael T. Chalifoux 1996 413,355 78,925 30,000
Senior Vice President, 1995 386,045 202,125 27,500
Chief Financial Officer 1994 350,094 109,025 22,500
and Secretary
W. Alan McCollough 1996 383,494 73,150 40,000
Senior Vice President 1995 278,549 134,750 16,500
Merchandising 1994 250,304 66,750 12,000
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The table below sets forth for the fiscal year ended February 29, 1996, the
grants of stock options and SARs to the executive officers named in the Summary
Compensation Table. The only SARs granted were Change of Control SARs, which
were granted in connection with each of the options. No free-standing SARs have
been granted.
<TABLE>
<CAPTION>
POTENTIAL REALIZATION
VALUE
AT ASSUMED ANNUAL RATES
OF
NUMBER OF STOCK PRICE APPRECIATION
SECURITIES % OF TOTAL FOR
UNDERLYING OPTIONS/SARS EXERCISE OPTION TERM(1)
OPTION/SARS GRANTED TO PRICE EXPIRATION ------------------------
GRANTED EMPLOYEES (2) DATE 5% 10%
------------ ------------ -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Sharp............................. 127,000 15.05% $22.50 3/9/02 $1,219,134 $2,788,299
Richard S. Birnbaum.......................... 45,000 5.33 22.50 3/9/02 431,977 987,980
John A. Fitzsimmons.......................... 30,000 3.55 22.50 3/9/02 287,984 658,653
Michael T. Chalifoux......................... 30,000 3.55 22.50 3/9/02 287,984 658,653
W. Alan McCollough........................... 40,000 4.74 22.50 3/9/02 383,979 878,204
</TABLE>
- ---------------
(1) Any such appreciation will inure to the benefit of all shareholders. The
value of the Company's outstanding Existing Common Stock would increase by
approximately $886,700,439 and $2,066,353,983, based on assumed stock price
appreciation rates of 5% and 10%, respectively, from the grant date of the
options expiring in 2002 until the end of such options' term.
(2) The exercise price for all of the options is the fair market value of the
Common Stock on the date of grant.
58
<PAGE>
AGGREGATED OPTIONS/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
The table below sets forth information concerning option exercises and
fiscal year-end option/SAR values as of February 29, 1996, for the executive
officers named in the Summary Compensation Table. The only SARs outstanding were
Change of Control SARs.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS/SARS
UNDERLYING UNEXERCISED AT
NUMBER OF OPTIONS/SARS AT FEBRUARY
SHARES FEBRUARY 29, 1996 29, 1996
ACQUIRED VALUE ---------------------------- -----------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE
----------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Richard L. Sharp 0 $ 0 569,284 310,750 $ 6,233,675
Richard S. Birnbaum 0 0 100,934 99,100 1,261,609
John A. Fitzsimmons 144,198 2,239,494 0 74,250 0
Michael T. Chalifoux 0 0 107,305 69,675 1,341,725
W. Alan McCollough 0 0 62,391 63,375 915,930
<CAPTION>
UNEXERCISABLE
-------------
<S> <C>
Richard L. Sharp $ 2,790,859
Richard S. Birnbaum 892,713
John A. Fitzsimmons 672,703
Michael T. Chalifoux 613,341
W. Alan McCollough 527,188
</TABLE>
PENSION PLAN TABLE
The following table illustrates estimated annual retirement benefits
payable under the Company's defined benefit pension plan (the "Pension Plan") to
persons in specified compensation and years of service classifications.
<TABLE>
<CAPTION>
ESTIMATED* ANNUAL PENSION FOR REPRESENTATIVE YEARS
HIGHEST CONSECUTIVE OF CREDITED SERVICE
FIVE-YEAR AVERAGE -----------------------------------------------------
COMPENSATION 15 20 25 30 35
- --------------------------------------------------------------------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
$ 400,000........................................................... 87,368 116,490 145,613 174,735 203,858
$ 600,000........................................................... 132,368 176,490 220,613 264,735 308,858
$ 800,000........................................................... 177,368 236,490 295,613 354,735 413,858
$1,000,000........................................................... 222,368 296,490 370,613 444,735 518,858
$1,200,000........................................................... 267,368 356,490 445,613 534,735 623,858
$1,400,000........................................................... 312,368 416,490 520,613 624,735 728,858
$1,600,000........................................................... 357,368 476,490 595,613 714,735 833,858
$1,800,000........................................................... 402,368 536,490 670,613 804,735 938,858
$2,000,000........................................................... 447,368 596,490 745,613 894,735 1,043,858
</TABLE>
- ---------------
* Notwithstanding the estimates set forth in the table, the annual pension
payable from the Pension Plan is limited to $120,000, effective January 1,
1996, for a participant who retires at age 65. This limit, which is subject to
annual cost of living adjustments, is imposed on tax-qualified defined benefit
plans under the Internal Revenue Code and also may vary in individual cases if
retirement occurs early or late. Additionally, the maximum amount of annual
compensation that may be taken into account with respect to a participant is
limited under the Internal Revenue Code. The compensation limit effective in
1996 is $150,000. The benefits shown above do not reflect these limits.
The Pension Plan covers employees who satisfy certain age and service
requirements. 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. For 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.
For 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 Pension Plan, credited years of past and future service
for Messrs. Sharp, Birnbaum, Fitzsimmons, Chalifoux and McCollough will be 29,
45, 21, 29 and 27 years, respectively, at age 65.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company has employment agreements with each of the executive officers
named in the Summary Compensation Table. Generally, these agreements provide for
annual salary review and participation in the Company's bonus, stock incentive
and other employee benefit programs. They also provide for continuation of base
salary for specified periods following termination by the Company without cause
(two years in the case of Mr. Sharp, one year for the other named executive
officers). In such circumstances, the agreements also generally provide that the
employee will be paid any bonus to which he
59
<PAGE>
would otherwise be entitled for that year, such bonus to be prorated if
termination occurs in the first six months of the year. The salary continuation
generally extends for another year if the termination without cause follows a
change of control. The Company's salary continuation obligation will decrease by
up to 50% if the individual secures alternative employment; however, no decrease
will occur if the termination is related to a change of control. In addition, if
the employee voluntarily terminates the employment relationship within one year
following a change of control, the employee will be entitled to continuation of
base salary for a specified period of time (two years in the case of Mr. Sharp,
one year for the other named executive officers) and potential payment of a
bonus as indicated above. Each agreement contains provisions confirming the
employee's obligation to maintain the confidentiality of proprietary information
and not to compete with the Company for a specified period of time after the
termination of his employment. The agreement with Mr. Birnbaum became effective
in 1983. The agreement with Mr. Fitzsimmons became effective in 1988. The
agreements with Messrs. Sharp and Chalifoux became effective in 1986 and 1989,
respectively. The agreement with Mr. McCollough became effective in 1995. The
current base salaries of Messrs. Sharp, Birnbaum, Fitzsimmons, Chalifoux and
McCollough under their employment agreements are $685,000, $500,000, $465,000,
$410,000 and $380,000, respectively.
The named executive officers have been granted SARs in connection with the
stock options granted to them under the Company's stock incentive plans. The
options also provide for accelerated vesting in the event of a change of
control. The SARs are Change of Control SARs that may be exercised only in the
event of a change of control. Upon exercise of the SAR and the surrender of the
related option, the holder is entitled to receive cash from the Company in the
amount of the spread between the option exercise price and the market value of
the Common Stock at the time of exercise, which value is determined by a formula
designed to take into account the effect of the change of control.
COMPENSATION OF DIRECTORS
Directors who are not employees receive annual compensation of $22,000,
plus $1,000 for attendance at each Board of Directors meeting and $500 for
attendance at each committee meeting. Directors who serve as committee chairmen
receive additional annual compensation of $2,000. Employees who are also
directors do not receive directors' fees, nor does Mr. Wurtzel.
Directors who are not full-time employees of the Company also receive
awards under the 1989 Non-Employee Directors Stock Option Plan (the "1989
Plan"). Stock option grants under the 1989 Plan are automatic. Every year on the
date of the annual meeting of the Company's shareholders, stock options are
automatically granted to each eligible director. If elected on a date other than
the annual meeting date, a director also may be entitled to a grant at that time
depending on the amount of time between the election and the next annual
meeting. The options generally become exercisable three years after the date of
the grant. The 1989 Plan currently provides that the number of shares of
Existing Common Stock subject to the options will be such that the exercise
price of the options multiplied by such number of shares is as near as possible
to, but does not exceed, $75,000. The exercise price of options granted under
the 1989 Plan is the fair market value of the Existing Common Stock on the date
of the option grant. A like number of Change of Control SARs are automatically
granted in connection with each stock option grant.
On June 13, 1995, seven non full-time employee members of the Board of
Directors were each granted 2,469 stock options under the 1989 Plan at an option
price of $30.375 per share.
Directors may elect to participate in the Company's deferral of director
compensation program which was approved by the Board of Directors and became
effective on August 15, 1995. Under this program, the Company offers members of
the Board of Directors the alternative of deferring all or part of their
directors' fees, subject to certain conditions. Any amounts deferred by a
director will be credited to an account established for the director on the
books of the Company (the "Deferral Account"). The Deferral Account will also be
credited, as of the end of each fiscal year of the Company, until such time as
no balance remains in the Deferral Account, with an additional amount equal to
the product of (i) the average daily balance credited to the Deferral Account
during that fiscal year and (ii) a percentage equal to the average of the five
year Treasury Bill rates in effect on the first business day of each fiscal
quarter during such fiscal year plus 30 basis points. The total amount credited
to the Deferral Account will become payable to the director when such director
ceases to serve as a director of the Company pursuant to a payment schedule
specified by the director.
During the fiscal year ended February 29, 1996, the Company had an
employment agreement with Mr. Wurtzel, Vice-Chairman of the Board of Directors,
under which Mr. Wurtzel received a salary and certain benefits for services as a
part-time employee of the Company. The agreement was to be effective through
1998 when Mr. Wurtzel will reach age 65.
60
<PAGE>
Mr. Wurtzel's base salary under the agreement was $90,000 with annual increases
of $5,000. The value of perquisites provided to Mr. Wurtzel under the agreement
during the fiscal year was $65,895. The agreement included non-compete and
confidentiality provisions similar to those in the named executive officers'
agreements.
In January 1996, Mr. Wurtzel and the Company agreed to replace the
agreement described above with a new agreement under which Mr. Wurtzel ceased to
be employed by the Company and to participate in various Company benefit plans
for employees. Under the new agreement, the Company agreed to pay Mr. Wurtzel
the lump sum of $56,565 plus $11,275 in monthly installments from February 1996
to September 1998. He also will receive annual perquisites valued at
approximately $65,000. The installment payments will be adjusted to reflect
changes over the term of the agreement in the value of the benefits that they
are designed to replace. If Mr. Wurtzel dies while the agreement is still in
effect, his beneficiary will continue to receive half the remaining payments
that would have been made to him under the agreement. Mr. Wurtzel also executed
a new non-compete and confidentiality agreement that will be effective during
the term of the contract.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information about the equity securities of
the Company beneficially owned as of December 11, 1996 by (i) each executive
officer named in the tables appearing in the Summary Compensation Table; (ii)
each director or nominee for director of the Company; (iii) directors and
executive officers as a group; and (iv) each person who is known by the Company
to own beneficially more than 5% of the outstanding shares of Existing Common
Stock. Unless otherwise noted, each individual has sole voting power and sole
investment power with respect to securities beneficially owned.
<TABLE>
<CAPTION>
OPTION SHARES WHICH
MAY BE ACQUIRED NUMBER OF SHARES
WITHIN 60 DAYS AFTER BENEFICIALLY OWNED AS OF PERCENT
NAME DECEMBER 11, 1996 DECEMBER 11, 1996 (1) OF CLASS
- ---------------------------------------------------------------- -------------------- ------------------------ --------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
Richard L. Sharp**.............................................. 499,849 1,450,254 1.5
Richard S. Birnbaum............................................. 105,876 176,428 *
John A. Fitzsimmons............................................. 31,125 68,176 *
Michael T. Chalifoux**.......................................... 112,997 186,406 *
W. Alan McCollough.............................................. 84,516 98,526 *
DIRECTORS
Richard N. Cooper............................................... 13,773 39,453 *
Barbara S. Feigin............................................... 0 500 *
Theodore D. Nierenberg.......................................... 13,773 80,119(2) *
Hugh G. Robinson................................................ 0 0 *
Walter J. Salmon................................................ 4,163 12,763 *
Mikael Salovaara................................................ 0 2,000(3) *
John W. Snow.................................................... 0 0 *
Edward Villanueva............................................... 4,579 254,259(4) *
Alan L. Wurtzel................................................. 13,773 506,471(5) *
All directors and executive officers
as a group (17 persons)....................................... 987,873 3,046,002 3.1
BENEFICIAL OWNERS OF MORE THAN 5%
FMR Corp.
82 Devonshire Street
Boston, MA 02109................................................ N/A 11,744,776(6) 12.0
</TABLE>
- ---------------
* Less than 1% of Class, based on the number of shares of Existing Common Stock
outstanding on December 11, 1996.
** Messrs. Sharp and Chalifoux also are directors of the Company.
(1) Includes the shares of Common Stock that could be acquired through exercise
of stock options within 60 days after December 11, 1996. For beneficial
owners of more than 5%, the number of beneficially owned shares is as of
December 31, 1995.
(2) Includes 31,000 shares owned by Mr. Nierenberg's wife. Mr. Nierenberg
disclaims beneficial ownership of such 31,000 shares.
61
<PAGE>
(3) Includes 1,000 shares held by Mikael Salovaara and B.A.S. Salovaara
Foundation Trust. Mr. Salovaara disclaims beneficial ownership of such 1,000
shares.
(4) Includes 16,600 shares held by Mr. Villanueva as trustee of trusts for the
benefit of his children. Mr. Villanueva disclaims beneficial ownership of
such 16,600 shares.
(5) Includes 153,200 shares held by Mr. Wurtzel as trustee of trusts for the
benefit of his children, 259,498 shares held by Alan Wurtzel Revocable Trust
and 80,000 shares held by Alan Wurtzel Charitable Remainder Unitrust. Mr.
Wurtzel disclaims beneficial ownership of all the aforementioned shares.
(6) Information concerning the shares owned by FMR Corp. as of December 31,
1995, was obtained from a Schedule 13G dated February 14, 1996. The filing
indicates that of the 11,744,776 shares beneficially owned, FMR Corp. has
sole voting power of 287,576 shares, shared voting power of 4,000 shares,
sole dispositive power of 11,740,776 shares and shared dispositive power of
4,000 shares.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in Annexes V, VI and VII, including statements
regarding the CarMax Group's growth strategy and the implementation of its
expansion plan, CarMax's ability to fund such expansion plan, the projected
growth and results of operations of the CarMax Group's business and the factors
contributing thereto, the Circuit City Group's Superstore expansion plans, the
Company's growth projections and the Company's liquidity needs, and other
statements contained herein regarding matters that are not historical facts, are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed in
the Company's 1996 Annual Report on Form 10-K.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company and the financial
statements of the Circuit City Group and the CarMax Group as of February 29,
1996 and February 28, 1995, and for each of the three years in the period ended
February 29, 1996, included in this Proxy Statement have been audited by KPMG
Peat Marwick LLP, independent auditors, as stated in their reports included
herein.
Representatives of KPMG Peat Marwick LLP will be present at the Special
Meeting. Such representatives will have the opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
PROPOSALS BY SHAREHOLDERS FOR PRESENTATION
AT THE 1997 ANNUAL MEETING
Section 1.3 of the Company's 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 the principal office of the Company. Any
such notice must be received (i) on or after March 1st and before April 1st of
the year in which the meeting will be held, if clause (ii) is not applicable, or
(ii) not less than 60 days before the date of the meeting if the date for such
meeting prescribed in the Bylaws has been changed by more than 30 days. The
shareholder's notice shall set forth (i) the name and address, as they appear on
the Company's stock transfer books, of the shareholder, (ii) the class and
number of shares of stock of the Company beneficially owned by the shareholder,
(iii) 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, (iv) a brief
description of the business desired to be brought before the meeting, including
the complete text of any resolution to be presented and the reasons for wanting
to conduct such business and (v) any interest which the shareholder may have in
such business.
Proposals that any shareholder desires to have included in the proxy
statement for the 1997 annual meeting of shareholders must be received by the
Company no later than January 10, 1997. Any such proposal must meet the
applicable requirements of the Exchange Act and the rules and regulations
thereunder.
By Order of the Board of Directors
/s/ MICHAEL T. CHALIFOUX
MICHAEL T. CHALIFOUX, SECRETARY
December 24, 1996
62
<PAGE>
ANNEX I
ILLUSTRATIONS OF CERTAIN TERMS
The following illustrations demonstrate the calculations of the Circuit
City Group's Inter-Group Interest in the CarMax Group based on the assumptions
set forth herein and using (i) 125 million shares as the number of shares
designated and authorized for issuance as CarMax Stock and (ii) 75.44 million
shares as the number of shares of CarMax Stock initially issuable with respect
to the Circuit City Group's Inter-Group Interest in the CarMax Group (the
"Number of Shares Issuable with Respect to the Inter-Group Interest").
Accordingly, 75.44 million shares is the number of shares of CarMax Stock that
initially represents 100% of the common shareholders' equity of the CarMax Group
("Equity Value"). Unless otherwise stated, each illustration below should be
read independently as if none of the other transactions referred to below had
occurred.
At any time, the fractional interest in the Equity Value of the CarMax
Group that is held by the holders of the outstanding CarMax Stock (the
"Outstanding CarMax Fraction") would be equal to:
Outstanding Shares of CarMax Stock
------------------------------------------
Outstanding Shares of CarMax Stock +
Number of Shares Issuable with Respect to the
Inter-Group Interest
The balance of the Equity Value of the CarMax Group is for the account of
the Circuit City Group (the "Inter-Group Interest"), and, at any time, the
fractional interest in the Equity Value of the CarMax Group that is represented
by the Inter-Group Interest (the "Inter-Group Interest Fraction") would be equal
to:
Number of Shares Issuable with Respect to the
Inter-Group Interest
------------------------------------------
Outstanding Shares of CarMax Stock +
Number of Shares Issuable with Respect to the
Inter-Group Interest
The sum of the Outstanding CarMax Fraction and the Inter-Group Interest
Fraction would always equal 100%.
CARMAX STOCK OFFERING
The following illustration (as well as all subsequent illustrations)
assumes the sale by the Company of 18.86 million shares of CarMax Stock for the
account of the CarMax Group in the CarMax Stock Offering.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 0
Newly issued shares of CarMax Stock................................................... 18.86 million
--------------
Total issued and outstanding after CarMax Stock Offering.............................. 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the issuance of
any shares of CarMax Stock for the account of the CarMax Group.
(Bullet) As a result of the CarMax Stock Offering, the issued and
outstanding shares of CarMax Stock (18.86 million) would represent
an Outstanding CarMax Fraction of 20.0%, calculated as follows:
18.86 million
-----------------------------
18.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 80.0%.
(Bullet) In this case, in the event of any dividend or other distribution
paid on the outstanding shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock),
the financial statements of the Circuit City Group would be
credited, and the financial statements of the CarMax Group would
be charged, with an amount equal to 400% of the aggregate amount
of such dividend or distribution (representing the ratio of the
Number of Shares Issuable with Respect to the Inter-Group Interest
(75.44 million) to the total number of shares of CarMax Stock
issued and outstanding following the initial public offering
(18.86 million)). If, for example, a dividend of $0.10 per share
I-1
<PAGE>
were declared and paid on the 18.86 million shares of CarMax Stock
outstanding (an aggregate of $1,886,000), the Circuit City Group
financial statements would be credited with $7,544,000, and the
CarMax Group financial statements would be charged with that
amount in addition to the $1,886,000 dividend paid to the holders
of the outstanding CarMax Stock (for a total of $9,430,000).
(Bullet) Immediately after the CarMax Stock Offering, the Company would
have 106.14 million shares of CarMax Stock designated and
available for issuance (125 million less 18.86 million issued and
outstanding).
FUTURE OFFERINGS OF CARMAX STOCK
The following illustrations reflect the sale by the Company of 5 million
shares of CarMax Stock after the CarMax Stock Offering.
OFFERING FOR THE CARMAX GROUP
Assume all of such shares are identified for the account of the CarMax
Group as an additional equity interest in the CarMax Group, with the net
proceeds reflected in the financial statements of the CarMax Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 5 million
--------------
Total issued and outstanding after offering........................................... 23.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the issuance of
any shares of CarMax Stock for the account of the CarMax Group.
(Bullet) The total issued and outstanding shares of CarMax Stock (23.86
million) would represent an Outstanding CarMax Fraction of 24.0%,
calculated as follows:
23.86 million
-----------------------------
23.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 76.0%.
(Bullet) After such future offering, in the event of any dividend or other
distribution paid on the outstanding shares of CarMax Stock (other
than a dividend or other distribution payable in shares of CarMax
Stock), the financial statements of the Circuit City Group would
be credited, and the financial statements of the CarMax Group
would be charged, with a total amount equal to 316.2% of the
aggregate amount of such dividend or distribution (representing
the ratio of the Number of Shares Issuable with Respect to the
Inter-Group Interest (75.44 million) to the total number of shares
of CarMax Stock issued and outstanding following the public
offering (23.86 million)).
(Bullet) Immediately after the CarMax Stock Offering, the Company would
have 101.14 million shares of CarMax Stock designated and
available for issuance (125 million less 23.86 million issued and
outstanding).
OFFERING FOR THE CIRCUIT CITY GROUP
Assume all of such shares are identified for the account of the Circuit
City Group with respect to the Inter-Group Interest, with the net proceeds
reflected in the financial statements of the Circuit City Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 5 million
--------------
Total issued and outstanding after offering........................................... 23.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would decrease by the number of any shares of CarMax
Stock issued for the account of the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
offering............................................................................ 75.44 million
Shares issued in offering............................................................. 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after offering..... 70.44 million
--------------
--------------
</TABLE>
I-2
<PAGE>
(Bullet) The total issued and outstanding shares of CarMax Stock (23.86
million) would represent an Outstanding CarMax Fraction of 25.3%,
calculated as follows:
23.86 million
-----------------------------
23.86 million + 70.44 million
The Inter-Group Interest Fraction would accordingly be 74.7%.
(Bullet) In this case, in the event of any dividend or other distribution
paid on the outstanding shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock),
the financial statements of the Circuit City Group would be
credited, and the financial statements of the CarMax Group would
be charged, with an amount equal to 295.2% of the aggregate amount
of such dividend or distribution (representing the ratio of the
Number of Shares Issuable with Respect to the Inter-Group Interest
(70.44 million) to the total number of shares of CarMax Stock
issued and outstanding following the public offering (23.86
million)).
(Bullet) Immediately after the public offering, the Company would have
101.14 million shares of CarMax Stock designated and available for
issuance (125 million less 23.86 million issued and outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES
If the Company were to issue any debt or preferred stock convertible into
shares of CarMax Stock, the Outstanding CarMax Fraction and the Inter-Group
Interest Fraction would be unchanged at the time of such issuance. If any shares
of CarMax Stock were issued upon conversion of such convertible securities,
however, then the Outstanding CarMax Fraction and the Inter-Group Interest
Fraction would be affected as shown above under "Offering for the CarMax Group,"
if such convertible securities were allocated to the CarMax Group, or under
"Offering for the Circuit City Group," if such convertible securities were
allocated to the Circuit City Group.
CARMAX STOCK DIVIDENDS
The following illustrations reflect dividends of CarMax Stock on
outstanding CarMax Stock and outstanding Circuit City Stock, respectively, after
the CarMax Stock Offering.
CARMAX STOCK DIVIDEND ON CARMAX STOCK
Assume the Company declares a dividend of one share of CarMax Stock on each
outstanding share of CarMax Stock.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 18.86 million
--------------
Total issued and outstanding after dividend........................................... 37.72 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased proportionately to reflect the stock
dividend payable in shares of CarMax Stock to holders of CarMax
Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
dividend........................................................................... 75.44 million
Adjustment to reflect dividend of shares on outstanding shares of CarMax Stock....... 75.44 million
---------------
Number of Shares Issuable with Respect to the Inter-Group Interest after dividend.... 150.88 million
---------------
---------------
</TABLE>
The total issued and outstanding shares of CarMax Stock (37.72 million)
would continue to represent an Outstanding CarMax Fraction of 20.0%,
calculated as follows:
37.72 million
------------------------------
37.72 million + 150.88 million
The Inter-Group Interest Fraction accordingly would continue to be 80.0%.
(Bullet) Immediately after the dividend, the Company would have 87.28
million shares of CarMax Stock designated and available for
issuance (125 million less 37.72 million issued and outstanding).
I-3
<PAGE>
CARMAX STOCK DIVIDEND ON CIRCUIT CITY STOCK
Assume 100 million shares of Circuit City Stock are outstanding and the
Company declares a dividend of 1/10 of a share of CarMax Stock on each
outstanding share of Circuit City Stock.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 10 million
--------------
Total issued and outstanding after dividend........................................... 28.86 million
--------------
--------------
</TABLE>
(Bullet) Any dividend of shares of CarMax Stock to the holders of shares of
Circuit City Stock will be treated as a dividend of shares
issuable with respect to the Inter-Group Interest. As a result,
the Number of Shares Issuable with Respect to the Inter-Group
Interest would decrease by the number of shares of CarMax Stock
dividended to the holders of Circuit City Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
dividend............................................................................ 75.44 million
Shares dividended on outstanding shares of Circuit City Stock......................... 10 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after dividend..... 65.44 million
--------------
--------------
</TABLE>
The Company will not dividend to holders of Circuit City Stock a number
of shares of CarMax Stock exceeding the then Number of Shares Issuable
with Respect to the Inter-Group Interest.
(Bullet) The total issued and outstanding shares (28.86 million) would
represent an Outstanding Interest Fraction of 30.6%, calculated as
follows:
28.86 million
-----------------------------
28.86 million + 65.44 million
The Inter-Group Interest Fraction would accordingly be 69.4%. Note,
however, that after the dividend the holders of Circuit City Stock would
also hold 10 million shares of CarMax Stock, which would represent a
direct interest of 10.6% in the equity value of the CarMax Group (and,
together with the 69.4% Inter-Group Interest, would continue to be a
total interest in the equity value of the CarMax Group of 80.0%).
(Bullet) Immediately after the dividend, the Company would have 96.14
million shares of CarMax Stock designated and available for
issuance (125 million less 28.86 million issued and outstanding).
REPURCHASES OF CARMAX STOCK
The following illustrations reflect the repurchase by the Company of 5
million shares of CarMax Stock after the CarMax Stock Offering.
REPURCHASE WITH CARMAX GROUP FUNDS
Assume all such shares are identified as having been repurchased with funds
allocated to the CarMax Group, with the financial statements of the CarMax Group
being charged with the consideration paid for such shares:
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Shares of CarMax Stock repurchased.................................................... 5 million
--------------
Total issued and outstanding after repurchase......................................... 13.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the repurchase of
any shares of CarMax Stock with funds allocated to the CarMax
Group.
(Bullet) The total issued and outstanding shares of CarMax Stock (13.86
million) would represent an Outstanding CarMax Fraction of 15.5%,
calculated as follows:
13.86 million
-----------------------------
13.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 84.5%.
I-4
<PAGE>
(Bullet) Immediately after the repurchase, the Company would have 111.14
million shares of CarMax Stock designated and available for
issuance (125 million less 13.86 million issued and outstanding).
REPURCHASE WITH CIRCUIT CITY GROUP FUNDS
Assume all such shares are identified as having been repurchased with funds
allocated to the Circuit City Group, with
the financial statements of the Circuit City Group being charged with the
consideration paid for such shares:
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Shares of CarMax Stock repurchased.................................................... 5 million
--------------
Total issued and outstanding after repurchase......................................... 13.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased by the number of any shares of CarMax
Stock repurchased with funds allocated to the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
repurchase.......................................................................... 75.44 million
Shares repurchased with funds allocated to Circuit City Group......................... 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after repurchase... 80.44 million
--------------
--------------
</TABLE>
(Bullet) The total issued and outstanding shares of CarMax Stock (13.86
million) would represent an Outstanding CarMax Fraction of 14.7%,
calculated as follows:
13.86 million
-----------------------------
13.86 million + 80.44 million
The Inter-Group Interest Fraction would accordingly be 85.3%.
(Bullet) Immediately after the repurchase, the Company would have 111.14
million shares of CarMax Stock designated and available for
issuance (125 million less 13.86 million issued and outstanding).
TRANSFERS OF ASSETS BETWEEN GROUPS
CONTRIBUTION OF ASSETS FROM CIRCUIT CITY GROUP TO CARMAX GROUP
The following illustration reflects the contribution as additional equity
by the Circuit City Group to the CarMax Group after the CarMax Stock Offering of
$100 million of assets attributed to the Circuit City Group on a date on which
the Fair Market Value of CarMax Stock is $20 per share.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 0
--------------
Total issued and outstanding after contribution....................................... 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased to reflect the contribution to the
CarMax Group of assets attributed to the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
contribution........................................................................ 75.44 million
Adjustment to reflect contribution to CarMax Group of assets attributed to Circuit
City Group.......................................................................... 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after
contribution........................................................................ 80.44 million
--------------
--------------
</TABLE>
I-5
<PAGE>
(Bullet) The total issued and outstanding shares of CarMax Stock (18.86
million) would represent an Outstanding CarMax Fraction of 19.0%,
calculated as follows:
18.86 million
-----------------------------
18.86 million + 80.44 million
The Inter-Group Interest Fraction would accordingly be 81.0%.
(Bullet) Immediately after the contribution, the Company would have 106.14
million shares of CarMax Stock designated and available for
issuance (125 million less 18.86 million issued and outstanding).
TRANSFER OF ASSETS FROM CARMAX GROUP TO CIRCUIT CITY GROUP
The following illustration reflects the transfer by the CarMax Group to the
Circuit City Group after the CarMax Stock Offering of $100 million of assets
attributed to the CarMax Group on a date on which the Fair Market Value of
CarMax Stock is $20 per share, assuming such transfer has been determined by the
Board of Directors to be treated as a reduction in the Circuit City Group's
equity interest in the CarMax Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 0
--------------
Total issued and outstanding after transfer........................................... 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be decreased to reflect the contribution to the
Circuit City Group of assets allocated to the CarMax Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
transfer............................................................................ 75.44 million
Adjustment to reflect transfer to Circuit City Group of assets allocated to CarMax
Group............................................................................... 5 million
-------------
Number of Shares Issuable with Respect to the Inter-Group Interest after transfer..... 70.44 million
-------------
-------------
</TABLE>
The Company will not make transfers of assets of the CarMax Group to the
Circuit City Group the fair value of which exceeds the Fair Market Value
of the then Number of Shares Issuable with Respect to the Inter-Group
Interest.
(Bullet) The total issued and outstanding shares of CarMax Stock (18.86
million) would represent an Outstanding CarMax Fraction of 21.1%,
calculated as follows:
18.86 million
-----------------------------
18.86 million + 70.44 million
The Inter-Group Interest Fraction would accordingly be 78.9%.
(Bullet) Immediately after the transfer, the Company would have 106.14
million shares of CarMax Stock designated and available for
issuance (125 million less 18.86 million issued and outstanding).
I-6
<PAGE>
ANNEX II-A
PROPOSAL 1
AMENDMENT TO ARTICLES OF INCORPORATION
RELATING TO ISSUANCE OF COMMON STOCK IN SERIES
TO BE ADOPTED BY SHAREHOLDERS
Article V of the Articles is proposed to be amended and restated in its
entirety as follows:
"A. GENERAL. Certain provisions relating to the Common Stock and the
relative rights of the Common Stock and the holders of the outstanding shares
thereof, regardless of series, are set forth below.
(1) ISSUANCE IN SERIES. The Board of Directors, by an adoption of an
amendment of these Amended and Restated Articles of Incorporation, may fix, in
whole or part, the preferences, limitations and relative rights, within the
limits set forth in applicable law, of one or more series of Common Stock of the
Corporation before the issuance of any shares of that series.
(2) PARITY OF ALL SHARES. All shares of Common Stock, regardless of series,
shall be identical with each other in all respects except as is permitted in
paragraph (A)(1) of this Article."
II-A-1
<PAGE>
AMENDMENT TO ARTICLES OF INCORPORATION
FIXING THE PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF TWO SERIES OF COMMON STOCK
TO BE ADOPTED BY THE BOARD OF DIRECTORS
Article V of the Articles is proposed to be further amended by adding
thereto a new Section B immediately following Section A of Article V, to read in
its entirety as follows:
"B. CIRCUIT CITY STOCK AND CARMAX STOCK.
(1) DESIGNATION OF SERIES; NUMBER OF SHARES OF EACH SERIES. One series of
Common Stock is hereby designated as "Circuit City Stores, Inc. -- Circuit City
Group Common Stock" ("Circuit City Stock") consisting of [125,000,000]* shares
and a second series of Common Stock is hereby designated as "Circuit City
Stores, Inc. -- CarMax Group Common Stock" ("CarMax Stock") consisting of
[125,000,000]* shares. The number of shares of each such series may from time to
time be increased (but not above the total number of authorized shares of the
class of Common Stock) or decreased (but not below the number of shares of such
series then outstanding) by the Board of Directors of the Corporation.
(2) DIVIDENDS. Subject to any preferences, limitations and relative rights
of any outstanding series of the Preferred Stock and any qualifications or
restrictions on the Common Stock created thereby, dividends may be declared and
paid upon the Circuit City Stock and the CarMax Stock, upon the terms with
respect to each such series, and subject to the limitations provided for below
in this paragraph B(2) of this Article, as the Board of Directors may determine.
(a) DIVIDENDS ON CIRCUIT CITY STOCK. Dividends on Circuit City Stock
may be declared and paid only out of the lesser of (i) the assets legally
available therefor and (ii) the Circuit City Group Available Dividend
Amount.
(b) DIVIDENDS ON CARMAX STOCK. Dividends on CarMax Stock may be
declared and paid only out of the lesser of (i) the assets legally
available therefor and (ii) the CarMax Group Available Dividend Amount.
(c) DISCRIMINATION IN DIVIDENDS BETWEEN SERIES OF COMMON STOCK. The
Board of Directors, subject to the provisions of paragraphs B(2)(a) and
B(2)(b) of this Article, may at any time declare and pay dividends
exclusively on Circuit City Stock, exclusively on CarMax Stock or on both
such series, in equal or unequal amounts, notwithstanding the relative
amounts of the Circuit City Group Available Dividend Amount and the CarMax
Group Available Dividend Amount, the amount of dividends previously
declared on each series, the respective voting or liquidation rights of
each series or any other factor.
(d) SHARE DISTRIBUTIONS. Subject to paragraphs B(2)(a) and B(2)(b) of
this Article, as the case may be, and except as permitted by paragraphs
B(5)(a) and B(5)(b)(ii)(2) of this Article, the Board of Directors may
declare and pay dividends or distributions of shares of the Common Stock
(or Convertible Securities convertible into or exchangeable or exercisable
for shares of the Common Stock) on shares of the Common Stock or shares of
the Preferred Stock only as follows:
(i) dividends or distributions of shares of Circuit City Stock (or
Convertible Securities convertible into or exchangeable or exercisable
for shares of Circuit City Stock) on shares of Circuit City Stock or
shares of the Preferred Stock attributed to the Circuit City Group;
(ii) dividends or distributions of shares of CarMax Stock (or
Convertible Securities convertible into or exchangeable or exercisable
for shares of CarMax Stock) on shares of CarMax Stock or shares of the
Preferred Stock attributed to the CarMax Group; and
(iii) dividends or distributions of shares of CarMax Stock (or
Convertible Securities convertible into or exchangeable or exercisable
for shares of CarMax Stock) on shares of Circuit City Stock or shares of
the Preferred Stock attributed to the Circuit City Group, but only if
the sum of (1) the number of shares of CarMax Stock to be so issued (or
the number of such shares which would be issuable upon conversion,
exchange or exercise of any Convertible Securities to be so issued) and
(2) the number of shares of CarMax Stock which are issuable upon
conversion, exchange or exercise of any Convertible Securities then
outstanding that are attributed in accordance with this Article to the
Circuit City Group is less than or equal to the Number of Shares
Issuable with Respect to the Inter-Group Interest.
- ---------------
* Subject to increase if the shareholders approve Proposal 2 relating to an
increase in the number of authorized shares of Common Stock.
II-A-2
<PAGE>
For purposes of this paragraph B(2)(d) of this Article, any
outstanding Convertible Securities that are convertible into or
exchangeable or exercisable for any other Convertible Securities which are
themselves convertible into or exchangeable or exercisable for Circuit City
Stock or CarMax Stock (or other Convertible Securities that are so
convertible, exchangeable or exercisable) shall be deemed to have been
converted, exchanged or exercised in full for such Convertible Securities.
(3) VOTING RIGHTS. Except as otherwise provided by law or by the terms of
any outstanding series of Preferred Stock or any provision of these Amended and
Restated Articles of Incorporation restricting the power to vote on a specified
matter to other shareholders, the entire voting power of the shareholders of the
Corporation shall be vested in the holders of the Common Stock, who shall be
entitled to vote on any matter on which the holders of stock of the Corporation
shall, by law or by the provisions of these Amended and Restated Articles of
Incorporation or Bylaws of the Corporation, be entitled to vote, and both series
of the Common Stock shall vote thereon together as a single voting group. On
each matter to be voted on by the holders of both series of the Common Stock
voting together as a single voting group, (i) each outstanding share of Circuit
City Stock shall have one vote and (ii) each outstanding share of CarMax Stock
shall have a number of votes (including a fraction of one vote) equal to the
number of votes determined by the ratio of the weighted average during the 20
Trading Days ending on the tenth Trading Day prior to the record date for
determining the shareholders entitled to vote of the Market Value of the CarMax
Stock to the weighted average over the same 20 Trading Days of the Market Value
of the Circuit City Stock, expressed as a decimal fraction rounded to the
nearest three decimal places, determined as follows: (A) the numerator of such
fraction shall be the sum of (1) four times the average Market Value of the
CarMax Stock over the period of five Trading Days ending on such tenth Trading
Day prior to such record date, (2) three times the average Market Value of the
CarMax Stock over the period of five Trading Days ending on the 15th Trading Day
prior to such record date, (3) two times the average Market Value of the CarMax
Stock over the period of five Trading Days ending on the 20th Trading Day prior
to such record date and (4) the average Market Value of the CarMax Stock over
the period of five Trading Days ending on the 25th Trading Day prior to such
record date and (B) the denominator of such fraction shall be the sum of (1)
four times the average Market Value of the Circuit City Stock over the period of
five Trading Days ending on such tenth Trading Day prior to such record date,
(2) three times the average Market Value of the Circuit City Stock over the
period of five Trading Days ending on the 15th Trading Day prior to such record
date, (3) two times the average Market Value of the Circuit City Stock over the
period of five Trading Days ending on the 20th Trading Day prior to such record
date and (4) the average Market Value of the Circuit City Stock over the period
of five Trading Days ending on the 25th Trading Day prior to such record date.
Notwithstanding the foregoing provisions of this paragraph B(3) of this
Article, if shares of only one series of the Common Stock are outstanding on the
record date for determining the common shareholders entitled to vote on any
matter, then each share of that series shall be entitled to one vote and, if
either series of the Common Stock is entitled to vote as a separate voting group
with respect to any matter, each share of that series shall, for purpose of such
vote, be entitled to one vote on such matter.
In addition to any provision of law or any provision of these Amended and
Restated Articles of Incorporation entitling the holders of outstanding shares
of Circuit City Stock or CarMax Stock to vote as a separate voting group, the
Board of Directors may condition the approval of any matter submitted to
shareholders on receipt of a separate vote of the holders of outstanding shares
of Circuit City Stock or CarMax Stock.
(4) LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or termination of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation and
the full preferential amounts (including any accumulated and unpaid dividends)
to which the holders of any outstanding shares of the Preferred Stock are
entitled (regardless of the Group to which such shares of the Preferred Stock
were attributed), the holders of the Circuit City Stock and CarMax Stock shall
be entitled to receive the assets, if any, of the Corporation remaining for
distribution to holders of the Common Stock on a per share basis in proportion
to the respective liquidation units per share of such series. Each share of
Circuit City Stock shall have one liquidation unit and each share of CarMax
Stock shall have .5 of a liquidation unit. Neither a merger nor share exchange
of the Corporation into or with any other company, nor a merger or share
exchange of any other company into or with the Corporation, nor a sale, lease,
exchange or other disposition of all or any part of the assets of the
Corporation, shall, alone, be deemed a liquidation of the Corporation, or cause
the dissolution of the Corporation, for purposes of this paragraph (B)(4) of
this Article.
If, after the Effective Date, the Corporation shall in any manner subdivide
(by stock split, reclassification or otherwise) or combine (by reverse stock
split, reclassification or otherwise) the outstanding shares of Circuit City
Stock or CarMax Stock, or declare a dividend or other distribution in shares of
either series to holders of such series, the per share liquidation
II-A-3
<PAGE>
units of either series of the Common Stock specified in the preceding paragraph
of this paragraph B(4) of this Article, as adjusted from time to time, shall be
appropriately adjusted, as determined by the Board of Directors, so as to avoid
dilution in the aggregate, relative liquidation rights of the shares of any
series of the Common Stock.
(5) CONVERSION OR REDEMPTION OF THE COMMON STOCK. The Circuit City Stock is
subject to conversion or redemption and the CarMax Stock is subject to
conversion or redemption upon the terms provided below in this paragraph B(5) of
this Article; provided, however, that neither series of the Common Stock may be
converted or redeemed if the other series has been converted or redeemed in its
entirety or notice thereof shall have been given as required by this paragraph
B(5) of this Article.
(a) MANDATORY AND OPTIONAL CONVERSION AND REDEMPTION OF COMMON STOCK
OTHER THAN FOR SUBSIDIARY STOCK. (i) In the event of the Disposition, in
one transaction or a series of related transactions, by the Corporation
and/or its subsidiaries of all or substantially all of the properties and
assets attributed to either Group to one or more persons or entities (other
than (1) the Disposition by the Corporation of all or substantially all its
properties and assets in one transaction or a series of related
transactions in connection with the liquidation, dissolution or termination
of the Corporation and the distribution of assets to shareholders as
referred to in paragraph B(4) of this Article, (2) the Disposition of the
properties and assets of either Group as contemplated by paragraph B(5)(b)
of this Article or otherwise to all holders of shares of such Group divided
among such holders on a pro rata basis in accordance with the number of
shares of stock issued in respect of such Group outstanding and, in the
case of a Disposition of the properties and assets attributed to the CarMax
Group, to the Corporation or subsidiaries thereof, divided among such
holders and the Corporation or subsidiaries thereof on a pro rata basis in
accordance with the number of shares of stock issued in respect of such
Group outstanding and the Number of Shares Issuable with Respect to the
Inter-Group Interest, (3) to any person or entity controlled (as determined
by the Board of Directors) by the Corporation or (4) in connection with a
Related Business Transaction), the Corporation shall, on or prior to the
85th Trading Day after the date of consummation of such Disposition (the
"Disposition Date"), pay a dividend on the series of the Common Stock
relating to the Group subject to such Disposition or redeem some or all of
such Common Stock or convert such Common Stock into Common Stock relating
to the other Group (or another class or series of common stock of the
Corporation), all as provided by the following paragraphs B(5)(a)(i)(1) and
B(5)(a)(i)(2) of this Article and, to the extent applicable, by paragraph
B(5)(d) of this Article, as the Board of Directors shall have selected
among such alternatives:
(1) provided that there are assets legally available therefor:
(a) pay to the holders of the shares of the series of the Common
Stock relating to the Group subject to such disposition a dividend, as
the Board of Directors shall have declared subject to compliance with
paragraph B(2) of this Article, in cash and/or in securities (other
than a dividend of the Common Stock) or other property having a Fair
Value as of the Disposition Date in the aggregate equal to (I) in the
case of a Disposition of the properties and assets attributed to the
Circuit City Group, the Fair Value of the Net Proceeds of such
Disposition and (II) in the case of a Disposition of the properties
and assets attributed to the CarMax Group, the product of the
Outstanding CarMax Fraction as of the record date for determining
holders entitled to receive such dividend multiplied by the Fair Value
of the Net Proceeds of such Disposition; or
(b) (I) subject to the last sentence of this paragraph B(5)(a)(i)
of this Article, if such Disposition involves all (not merely
substantially all) of the properties and assets attributed to such
Group, redeem as of the Redemption Date provided by paragraph
B(5)(d)(iii), all outstanding shares of the Common Stock relating to
the Group subject to such Disposition in exchange for cash and/or for
securities (other than the Common Stock) or other property having a
Fair Value as of the Disposition Date in the aggregate equal to (A) in
the case of a Disposition of the properties and assets attributed to
the Circuit City Group, the Fair Value of the Net Proceeds of such
Disposition and (B) in the case of a Disposition of the properties and
assets attributed to the CarMax Group, the product of the Outstanding
CarMax Fraction as of such Redemption Date multiplied by the Fair
Value of the Net Proceeds of such Disposition; or
(II) subject to the last sentence of this paragraph B(5)(a)(i) of
this Article, if such Disposition involves substantially all (but not
all) of the properties and assets attributed to such Group, redeem as
of the Redemption Date provided by paragraph B(5)(d)(iv) of this
Article such number of whole shares of the series of the Common Stock
relating to the Group subject to such Disposition (which may be all
of, but not more than, such shares outstanding) as have in the
aggregate an average Market Value during the period of ten consecutive
Trading Days beginning on the 16th Trading Day immediately succeeding
the Disposition Date closest to (A) in the case of a Disposition of
the properties and assets attributed to the Circuit City Group, the
Fair Value as
II-A-4
<PAGE>
of the Disposition Date of the Net Proceeds of such Disposition, in
consideration for cash and/or securities (other than the Common Stock)
or other property having a Fair Value in the aggregate equal to such
Fair Value of the Net Proceeds or (B) in the case of a Disposition of
the properties and assets attributed to the CarMax Group, the product
of the Outstanding CarMax Fraction as of the date such shares are
selected for redemption multiplied by the Fair Value as of the
Disposition Date of the Net Proceeds of such Disposition in
consideration for cash and/or securities (other than the Common Stock)
or other property having a Fair Value in the aggregate equal to such
product; or
(2) declare that each outstanding share of the series of the Common
Stock relating to the Group subject to such Disposition shall be
converted as of the Conversion Date provided by paragraph B(5)(d)(v) of
this Article into a number of fully paid and nonassessable shares of the
series of the Common Stock relating to the other Group (or, if the
series of the Common Stock relating to the other Group is not Publicly
Traded at such time and shares of another class or series of the Common
Stock of the Corporation (other than the series of the Common Stock
relating to the Group subject to such Disposition) are then Publicly
Traded, of such other class or series of the common stock as has the
largest Market Capitalization as of the close of business on the Trading
Day immediately preceding the date of the notice of such conversion
required by paragraph B(5)(d)(v) of this Article), equal to 110% of the
ratio, expressed as a decimal fraction rounded to the nearest five
decimal places, of the average Market Value of one share of the Common
Stock relating to the Group subject to such Disposition over the period
of 10 consecutive Trading Days beginning on the 16th Trading Day
following the Disposition Date to the average Market Value of one share
of the Common Stock relating to the other Group (or such other class or
series of common stock) over the same 10 Trading Day period.
Notwithstanding the foregoing provisions of this paragraph B(5)(a)(i) of
this Article, the Corporation shall redeem shares of a series of the Common
Stock as provided by paragraphs B(5)(a)(i)(1)(b)(I) or (II) of this Article
only if the amount to be paid in redemption of such stock is less than or
equal to the Available Dividend Amount with respect to the Group subject to
such Disposition as of the Redemption Date.
(ii) For purposes of this paragraph B(5)(a) of this Article:
(1) as of any date, "substantially all of the properties and
assets" attributed to either Group shall mean a portion of such
properties and assets (x) that represents at least 80% of the Fair
Value of the properties and assets attributed to such Group as of such
date or (y) from which were derived at least 80% of the aggregate
revenues for the immediately preceding twelve fiscal quarterly periods
of the Company (calculated on a pro forma basis to include revenues
derived from any of such properties and assets acquired during such
period) derived from the properties and assets of such Group as of
such date;
(2) in the case of a Disposition of the properties and assets
attributed to either Group in a series of related transactions, such
Disposition shall not be deemed to have been consummated until the
consummation of the last of such transactions; and
(3) the Board of Directors may pay any dividend or redemption
price referred to in paragraph B(5)(a) (i) of this Article in cash,
securities (other than the Common Stock) or other property, regardless
of the form or nature of the proceeds of the Disposition.
(iii) After the payment of the dividend or the redemption price
with respect to the series of the Common Stock relating to the Group
subject to a Disposition as provided for by paragraph B(5)(a)(i)(1) of
this Article, the Board of Directors may declare that each share of such
series of the Common Stock remaining outstanding shall be converted, but
only as of a Conversion Date (determined as provided by paragraph
B(5)(d)(v) of this Article) prior to the first anniversary of the
payment of such dividend or redemption price, into a number of fully
paid and nonassessable shares of the series of the Common Stock relating
to the other Group (or, if the series of the Common Stock relating to
the other Group is not Publicly Traded at such time and shares of any
other class or series of common stock of the Corporation (other than the
series of the Common Stock relating to the Group subject to such
Disposition) are then Publicly Traded, of such other class or series of
common stock of the Corporation as has the largest Market Capitalization
as of the close of business on the Trading Day immediately preceding the
date of the notice of such conversion required by paragraph B(5)(d)(v)
of this Article) equal to 110% of (i) in the case of conversion of the
Circuit City Stock, the Market Value Ratio of the Circuit City Stock to
the CarMax Stock or (ii) in the case of conversion of the CarMax Stock,
the Market Value Ratio of the CarMax Stock to the Circuit City
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<PAGE>
Stock, in each case, as of the fifth Trading Day prior to the date of
the notice of such conversion required by paragraph B(5)(d)(v) of this
Article.
(iv) The Board of Directors may at any time declare that each
outstanding share of either Circuit City Stock or CarMax Stock shall be
converted, as of the Conversion Date provided by paragraph B(5)(d)(v) of
this Article, into the number of fully paid and nonassessable shares of
CarMax Stock or Circuit City Stock, respectively (or, if such latter
series of common stock of the Corporation is not Publicly Traded at such
time and shares of any other class or series of common stock of the
Corporation (other than the series of the Common Stock subject to such
conversion) are then Publicly Traded, of such other class or series of
common stock of the Corporation as has the largest Market Capitalization
as of the close of business on the Trading Day immediately preceding the
date of the notice of conversion required by paragraph B(5)(d)(v) of
this Article) equal to 115% of (i) in the case of conversion of the
Circuit City Stock, the Market Value Ratio of the Circuit City Stock to
the CarMax Stock or (ii) in the case of conversion of the CarMax Stock,
the Market Value Ratio of the CarMax Stock to the Circuit City Stock, in
each case, as of the fifth Trading Day prior to the date of the notice
of such conversion required by paragraph B(5)(d)(v) of this Article.
(b) REDEMPTION OF COMMON STOCK FOR SUBSIDIARY STOCK. (i) At any
time at which all of the assets and liabilities attributed to the CarMax
Group (and no other assets or liabilities of the Corporation or any
subsidiary thereof) are held directly or indirectly by one or more
wholly-owned subsidiaries of the Corporation (each, a "CarMax Group
Subsidiary"), the Board of Directors may, provided that there are assets
legally available therefor, redeem all of the outstanding shares of
CarMax Stock, on a Redemption Date of which notice is delivered in
accordance with paragraph B(5)(d)(vi) of this Article, in exchange for
the number of shares of common stock of each CarMax Group Subsidiary
equal to the product of the Outstanding CarMax Fraction multiplied by
the number of shares of common stock of such CarMax Group Subsidiary to
be outstanding immediately following such exchange of shares, such
CarMax Group Subsidiary shares to be delivered to the holders of shares
of CarMax Stock on the Redemption Date either directly or indirectly
through another CarMax Group Subsidiary (as a wholly-owned subsidiary
thereof) and to be divided among the holders of CarMax Stock pro rata in
accordance with the number of shares of CarMax Stock held by each on
such Redemption Date, each of which shares of common stock of such
CarMax Group Subsidiary shall be, upon such delivery, fully paid and
nonassessable.
(ii) At any time at which all of the assets and liabilities
attributed to the Circuit City Group (and no other assets or liabilities
of the Corporation or any subsidiary thereof) are held directly or
indirectly by one or more wholly-owned subsidiaries of the Corporation
(each, a "Circuit City Group Subsidiary"), the Board of Directors may,
provided that there are assets legally available therefor,
(1) if the Number of Shares Issuable with Respect to the
Inter-Group Interest is zero, redeem all of the outstanding shares of
Circuit City Stock, on a Redemption Date of which notice is delivered
in accordance with paragraph B(5)(d)(vi) of this Article, in exchange
for all of the shares of common stock of each Circuit City Group
Subsidiary as will be outstanding immediately following such exchange
of shares, such shares of common stock of each Circuit City Group
Subsidiary to be delivered to the holders of shares of Circuit City
Stock on the Redemption Date either directly or indirectly through
another Circuit City Group Subsidiary (as a wholly-owned subsidiary
thereof) and to be divided among the holders of Circuit City Stock pro
rata in accordance with the number of shares of Circuit City Stock
held by each on such Redemption Date, each of which shares of common
stock of such Circuit City Group Subsidiary shall be, upon such
delivery, fully paid and nonassessable; or
(2) if the Number of Shares Issuable with Respect to the
Inter-Group Interest is greater than zero, either
(x) redeem all of the outstanding shares of Circuit City
Stock, on such a Redemption Date, in exchange for (1) all of the
shares of common stock of each Circuit City Group Subsidiary as
will be outstanding immediately following such exchange of shares
and (2) a number of shares of CarMax Stock equal to the Number of
Shares Issuable with Respect to the Inter-Group Interest, such
shares of common stock of each Circuit City Group Subsidiary to be
delivered to the holders of shares of Circuit City Stock on the
Redemption Date either directly or indirectly through another
Circuit City Group Subsidiary (as a wholly-owned subsidiary
thereof) and the shares of common stock of each Circuit City Group
Subsidiary and the shares of CarMax Stock to be divided among the
holders of Circuit City Stock pro rata in accordance with the
number of shares of Circuit City Stock held by each on such
Redemption Date, each of
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<PAGE>
which shares of common stock of each Circuit City Group Subsidiary
and shares of CarMax Stock shall be, upon such delivery, fully
paid and nonassessable; or
(y) (1) redeem all of the outstanding shares of Circuit City
Stock as contemplated by clause (x) (1) above and (2) issue to one
or more of the Circuit City Group Subsidiaries a number of shares
of CarMax Stock equal to the Number of Shares Issuable with
Respect to the Inter-Group Interest.
(c) TREATMENT OF CONVERTIBLE SECURITIES. After any Conversion Date or
Redemption Date on which all outstanding shares of either series of the
Common Stock are converted or redeemed, any share of such series of the
Common Stock that is to be issued on conversion, exchange or exercise of
any Convertible Securities shall, immediately upon such conversion,
exchange or exercise and without any notice from or to, or any other action
on the part of, the Corporation or its Board of Directors or the holder of
such Convertible Security:
(i) in the event the shares of such series of the Common Stock
outstanding on such Conversion Date were converted into shares of the
other series of the Common Stock (or another class or series of common
stock of the Corporation) pursuant to paragraph B(5)(a)(i)(2) or
paragraph B(5)(a)(iii) or (iv) of this Article, be converted into the
amount of cash and/or the number of shares of the kind of capital stock
and/or other securities or property of the Corporation that the number
of shares of such series of the Common Stock that were to be issued upon
such conversion, exchange or exercise would have received had such
shares been outstanding on such Conversion Date; or
(ii) in the event the shares of such series of the Common Stock
outstanding on such Redemption Date were redeemed pursuant to paragraph
B(5)(a)(i)(1)(b) or paragraph B(5)(b) of this Article, be redeemed, to
the extent of funds of the Corporation legally available therefor, for
$.01 per share in cash for each share of such series of the Common Stock
that otherwise would be issued upon such conversion, exchange or
exercise.
The provisions of the immediately preceding sentence shall not apply to the
extent that other adjustments in respect of such conversion, exchange or
redemption of a series of the Common Stock are otherwise made pursuant to
the provisions of such Convertible Securities.
(d) NOTICE AND OTHER PROVISIONS. (i) Not later than the tenth Trading
Day following the consummation of a Disposition referred to in paragraph
B(5)(a)(i) of this Article, the Corporation shall announce publicly by
press release (1) the Net Proceeds of such Disposition, (2) the number of
shares outstanding of the series of the Common Stock relating to the Group
subject to such Disposition, (3) the number of shares of such series of
Common Stock into or for which Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof and (4) in the case of a Disposition of the properties and assets
attributable to the CarMax Group, the Outstanding CarMax Fraction on the
date of such notice. Not earlier than the 26th Trading Day and not later
than the 30th Trading Day following the consummation of such Disposition,
the Corporation shall announce publicly by press release which of the
actions specified in paragraph B(5)(a)(i) of this Article, it has
irrevocably determined to take in respect of such Disposition.
(ii) If the Corporation determines to pay a dividend pursuant to
paragraph B(5)(a)(i)(1)(a) of this Article, the Corporation shall, not
later than the 30th Trading Day following the consummation of the
Disposition referred to in such paragraph, cause notice to be given to each
holder of shares of the series of the Common Stock relating to the Group
subject to such Disposition and to each holder of Convertible Securities
that are convertible into or exchangeable or exercisable for shares of such
series of Common Stock (unless alternate provision for such notice to the
holders of such Convertible Securities is made pursuant to the terms of
such Convertible Securities), setting forth (1) the record date for
determining holders entitled to receive such dividend, which shall be not
earlier than the 40th Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition, (2) the anticipated payment
date of such dividend (which shall not be more than 85 Trading Days
following the consummation of such Disposition), (3) the type of property
to be paid as such dividend in respect of the outstanding shares of such
series of Common Stock, (4) the Net Proceeds of such Disposition, (5) in
the case of a Disposition of the properties and assets attributable to the
CarMax Group, the Outstanding CarMax Fraction on the date of such notice,
(6) the number of outstanding shares of such series of Common Stock and the
number of shares of such series of Common Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof and (7)
in the case of notice to be given to holders of Convertible Securities, a
statement to the effect that a holder of such Convertible Securities shall
be entitled to receive such dividend only if such holder properly converts,
exchanges or exercises such Convertible Securities on or prior to the
record date referred to in clause (1) of this sentence. Such notice
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<PAGE>
shall be sent by first-class mail, postage prepaid, to each such holder at
such holder's address as the same appears on the transfer books of the
Corporation.
(iii) If the Corporation determines to undertake a redemption pursuant
to paragraph B(5)(a)(i)(1)(b)(I) of this Article, the Corporation shall,
not earlier than the 35th Trading Day and not later than the 45th Trading
Day prior to the Redemption Date, cause notice to be given to each holder
of shares of the series of the Common Stock relating to the Group subject
to the Disposition referred to in such paragraph and to each holder of
Convertible Securities convertible into or exchangeable or exercisable for
shares of such series of Common Stock (unless alternate provision for such
notice to the holders of such Convertible Securities is made pursuant to
the terms of such Convertible Securities), setting forth (1) a statement
that all shares of such series of Common Stock outstanding on the
Redemption Date shall be redeemed, (2) the Redemption Date (which shall not
be more than 85 Trading Days following the consummation of such
Disposition), (3) the type of property in which the redemption price for
the shares of such series of Common Stock to be redeemed is to be paid, (4)
the Net Proceeds of such Disposition, (5) in the case of a Disposition of
the properties and assets attributed to the CarMax Group, the Outstanding
CarMax Fraction on the date of such notice, (6) the place or places where
certificates for shares of such series of Common Stock, properly endorsed
or assigned for transfer (unless the Corporation waives such requirement),
are to be surrendered for delivery of cash and/or securities or other
property, (7) the number of outstanding shares of such series of Common
Stock and the number of shares of such series of the Common Stock into or
for which such outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, (8) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities shall be entitled to participate in such redemption only if such
holder properly converts, exchanges or exercises such Convertible
Securities on or prior to the Redemption Date referred to in clause (2) of
this sentence and a statement as to what, if anything, such holder will be
entitled to receive pursuant to the terms of such Convertible Securities
or, if applicable, this paragraph B(5) of this Article if such holder
thereafter converts, exchanges or exercises such Convertible Securities and
(9) a statement to the effect that, except as otherwise provided by
paragraph B(5)(d)(ix) of this Article, dividends on such shares of the
Common Stock shall cease to be paid as of such Redemption Date. Such notice
shall be sent by first-class mail, postage prepaid, to each such holder at
such holder's address as the same appears on the transfer books of the
Corporation.
(iv) If the Corporation determines to undertake a redemption pursuant
to paragraph B(5)(a)(i)(1)(b)(II) of this Article, the Corporation shall,
not later than the 30th Trading Day following the consummation of the
Disposition referred to in such paragraph, cause notice to be given to each
holder of shares of the series of the Common Stock relating to the Group
subject to such Disposition and to each holder of Convertible Securities
that are convertible into or exchangeable or exercisable for shares of such
series of Common Stock (unless alternate provision for such notice to the
holders of such Convertible Securities is made pursuant to the terms of
such Convertible Securities) setting forth (1) a date not earlier than the
40th Trading Day and not later than the 50th Trading Day following the
consummation of the Disposition in respect of which such redemption is to
be made on which shares of such series of the Common Stock shall be
selected for redemption, (2) the anticipated Redemption Date (which shall
not be more than 85 Trading Days following the consummation of such
Disposition), (3) the type of property in which the redemption price for
the shares to be redeemed is to be paid, (4) the Net Proceeds of such
Disposition, (5) in the case of a Disposition of the properties and assets
attributed to the CarMax Group, the Outstanding CarMax Fraction, (6) the
number of shares of such series of Common Stock outstanding and the number
of shares of such series of Common Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable
and the conversion, exchange or exercise price thereof, (7) in the case of
notice to be given to holders of Convertible Securities, a statement to the
effect that a holder of such Convertible Securities shall be eligible to
participate in such selection for redemption only if such holder properly
converts, exchanges or exercises such Convertible Securities on or prior to
the record date referred to in clause (1) of this sentence, and a statement
as to what, if anything, such holder will be entitled to receive pursuant
to the terms of such Convertible Securities or, if applicable, this
paragraph B(5) of this Article if such holder thereafter converts,
exchanges or exercises such Convertible Securities and (8) a statement that
the Corporation will not be required to register a transfer of any shares
of such series of the Common Stock for a period of 15 Trading Days next
preceding the date referred to in clause (1) of this sentence. Promptly
following the date referred to in clause (1) of the preceding sentence, but
not earlier than 40 Trading Days nor later than 50 Trading Days following
the consummation of such Disposition, the Corporation shall cause a notice
to be given to each holder of record of shares of such series of Common
Stock to be redeemed setting forth (1) the number of shares of such series
of Common Stock held by such holder to be redeemed, (2) a statement that
such shares of such series of Common Stock shall be redeemed, (3) the
Redemption Date, (4) the kind and per share amount of cash and/or
securities or other property to be received by such holder with respect to
each share of such series of Common Stock to be redeemed, including details
as to the calculation thereof, (5)
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<PAGE>
the place or places where certificates for shares of such series of Common
Stock, properly endorsed or assigned for transfer (unless the Corporation
shall waive such requirement), are to be surrendered for delivery of such
cash and/or securities or other property, (6) if applicable, a statement to
the effect that the shares being redeemed may no longer be transferred on
the transfer books of the Corporation after the Redemption Date and (7) a
statement to the effect that, subject to paragraph B(5)(d)(ix) of this
Article, dividends on such shares of such series of Common Stock shall
cease to be paid as of the Redemption Date. Such notices shall be sent by
first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Corporation.
(v) If the Corporation determines to convert either series of the
Common Stock into the other series (or another class or series of common
stock of the Corporation) pursuant to paragraph B(5)(a)(i)(2) or paragraph
B(5)(a)(iii) or (iv) of this Article, the Corporation shall, not earlier
than the 35th Trading Day and not later than the 45th Trading Day prior to
the Conversion Date, cause notice to be given to each holder of shares of
the series of the Common Stock to be so converted and to each holder of
Convertible Securities that are convertible into or exchangeable or
exercisable for shares of such series of Common Stock (unless alternate
provision for such notice to the holders of such Convertible Securities is
made pursuant to the terms of such Convertible Securities) setting forth
(1) a statement that all outstanding shares of such series of Common Stock
shall be converted, (2) the Conversion Date (which, in the case of a
conversion after a Disposition, shall not be more than 85 Trading Days
following the consummation of such Disposition), (3) the per share number
of shares of Circuit City Stock or CarMax Stock or another class or series
of common stock of the Corporation, as the case may be, to be received with
respect to each share of such series of Common Stock, including details as
to the calculation thereof, (4) the place or places where certificates for
shares of such series of Common Stock, properly endorsed or assigned for
transfer (unless the Corporation shall waive such requirement), are to be
surrendered for delivery of certificates for shares of such series of
Common Stock, (5) the number of outstanding shares of such series of Common
Stock and the number of shares of such series of Common Stock into or for
which outstanding Convertible Securities are then convertible, exchangeable
or exercisable and the conversion, exchange or exercise price thereof, (6)
a statement to the effect that, subject to paragraph B(5)(d)(ix) of this
Article, dividends on such shares of CarMax Stock shall cease to be paid as
of such Conversion Date and (7) in the case of notice to holders of such
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities shall be entitled to receive shares of such series
of Common Stock upon such conversion only if such holder properly converts,
exchanges or exercises such Convertible Securities on or prior to such
Conversion Date and a statement as to what, if anything, such holder will
be entitled to receive pursuant to the terms of such Convertible Securities
or, if applicable, this paragraph B(5) of this Article if such holder
thereafter converts, exchanges or exercises such Convertible Securities.
Such notice shall be sent by first-class mail, postage prepaid, to each
such holder at such holder's address as the same appears on the transfer
books of the Corporation.
(vi) If the Corporation determines to redeem shares of either series
of the Common Stock pursuant to paragraph B(5)(b) of this Article, the
Corporation shall cause notice to be given to each holder of shares of such
series of the Common Stock to be redeemed and to each holder of Convertible
Securities that are convertible into or exchangeable or exercisable for
shares of such series of the Common Stock (unless alternate provision for
such notice to the holders of such Convertible Securities is made pursuant
to the terms of such Convertible Securities), setting forth (1) a statement
that all shares of such series of the Common Stock outstanding on the
Redemption Date shall be redeemed in exchange for shares of common stock of
each Circuit City Group Subsidiary (and, if such redemption is pursuant to
paragraph B(5)(b)(ii)(2)(x) of this Article, CarMax Stock) or common stock
of each CarMax Group Subsidiary, as the case may be, (2) the Redemption
Date, (3) in the case of a redemption of the CarMax Stock, the Outstanding
CarMax Fraction on the date of such notice, (4) the place or places where
certificates for shares of the series of the Common Stock to be redeemed,
properly endorsed or assigned for transfer (unless the Corporation shall
waive such requirement), are to be surrendered for delivery of certificates
for shares of the common stock of each Circuit City Group Subsidiary (and,
if such redemption is pursuant to paragraph B(5)(b)(ii)(2)(x) of this
Article, CarMax Stock) or common stock of each CarMax Group Subsidiary, as
the case may be, (5) a statement to the effect that, subject to paragraph
B(5)(d)(ix) of this Article, dividends on such shares of the Common Stock
shall cease to be paid as of such Redemption Date, (6) the number of shares
of such series of the Common Stock outstanding and the number of shares of
such series of Common Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof and (7) in the case of
notice to holders of Convertible Securities, a statement to the effect that
a holder of Convertible Securities shall be entitled to receive shares of
common stock of each Circuit City Group Subsidiary (and, if such redemption
is pursuant to paragraph B(5)(b)(ii)(2)(x) of this Article, CarMax Stock)
or common stock of each CarMax Group Subsidiary, as the case may be, upon
redemption only if such holder
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<PAGE>
properly converts, exchanges or exercises such Convertible Securities on or
prior to the Redemption Date and a statement as to what, if anything, such
holder will be entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, this paragraph B(5) of this
Article, if such holder thereafter converts, exchanges or exercises such
Convertible Securities. Such notice shall be sent by first-class mail,
postage prepaid, not less than 30 Trading Days nor more than 45 Trading
Days prior to the Redemption Date to each such holder at such holder's
address as the same appears on the transfer books of the Corporation.
(vii) If less than all of the outstanding shares of the Common Stock
of a series are to be redeemed pursuant to paragraph B(5)(a)(i)(1) of this
Article, the shares to be redeemed by the Corporation shall be selected
from among the holders of shares of such series of the Common Stock
outstanding at the close of business on the record date for such redemption
on a pro rata basis among all such holders or by lot or by such other
method as may be determined by the Board of Directors of the Corporation to
be equitable.
(viii) The Corporation shall not be required to issue or deliver
fractional shares of any capital stock or of any other securities to any
holder of either series of the Common Stock upon any conversion,
redemption, dividend or other distribution pursuant to this paragraph B(5)
of this Article. If more than one share of either series of the Common
Stock shall be held at the same time by the same holder, the Corporation
may aggregate the number of shares of any capital stock that shall be
issuable or any other securities or property that shall be distributable to
such holder upon any conversion, redemption, dividend or other distribution
(including any fractional shares). If there are fractional shares of any
capital stock or of any other securities remaining to be issued or
distributed to the holders of either series of the Common Stock, the
Corporation shall, if such fractional shares are not issued or distributed
to the holder, pay cash in respect of such fractional shares in an amount
equal to the Fair Value thereof on the fifth Trading Day prior to the date
such payment is to be made (without interest).
(ix) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of either series of the Common
Stock; provided, however, that if the Conversion Date or Redemption Date,
as the case may be, with respect to any shares of either series of the
Common Stock shall be subsequent to the record date for the payment of a
dividend or other distribution thereon or with respect thereto, the holders
of such series of the Common Stock at the close of business on such record
date shall be entitled to receive the dividend or other distribution
payable on or with respect to such shares on the date set for payment of
such dividend or other distribution, in each case without interest,
notwithstanding the subsequent conversion or redemption of such shares.
(x) Before any holder of either series of the Common Stock shall be
entitled to receive any cash payment and/or certificates or instruments
representing shares of any capital stock and/or other securities or
property to be distributed to such holder with respect to such series of
the Common Stock pursuant to this paragraph B(5) of this Article, such
holder shall surrender at such place as the Corporation shall specify
certificates for such shares of the Common Stock, properly endorsed or
assigned for transfer (unless the Corporation shall waive such
requirement). The Corporation shall as soon as practicable after receipt of
certificates representing such shares of the Common Stock deliver to the
person for whose account such shares of the Common Stock were so
surrendered, or to such person's nominee or nominees, the cash and/or the
certificates or instruments representing the number of whole shares of the
kind of capital stock and/or other securities or property to which such
person shall be entitled as aforesaid, together with any payment in respect
of fractional shares contemplated by paragraph B(5)(d)(viii) of this
Article, in each case without interest. If less than all of the shares of
either series of the Common Stock represented by any one certificate are to
be redeemed, the Corporation shall issue and deliver a new certificate for
the shares of such series of Common Stock not redeemed.
(xi) From and after any applicable Conversion Date or Redemption Date,
as the case may be, all rights of a holder of shares of either series of
the Common Stock that were converted or redeemed shall cease except for the
right, upon surrender of the certificates representing such shares of the
Common Stock as required by paragraph B(5)(d)(x) of this Article, to
receive the cash and/or the certificates or instruments representing shares
of the kind and amount of capital stock and/or other securities or property
for which such shares were converted or redeemed, together with any payment
in respect of fractional shares contemplated by paragraph B(5)(d)(viii) of
this Article and rights to dividends as provided in paragraph B(5)(d)(ix)
of this Article, in each case without interest. No holder of a certificate
that immediately prior to the applicable Conversion Date represented shares
of a series of the Common Stock shall be entitled to receive any dividend
or other distribution or interest payment with respect to shares of any
kind of capital stock or other security or instrument for which such series
of the Common Stock was converted until the surrender as required by this
paragraph B(5) of this Article of such certificate in exchange for a
certificate or certificates or instrument or instruments representing such
capital stock or other security. Subject to applicable escheat and similar
laws, upon such surrender, there shall
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be paid to the holder the amount of any dividends or other distributions
(without interest) which theretofore became payable on any class or series
of capital stock of the Corporation as of a record date after the
Conversion Date, but that were not paid by reason of the foregoing, with
respect to the number of whole shares of the kind of capital stock
represented by the certificate or certificates issued upon such surrender.
From and after a Conversion Date, the Corporation shall, however, be
entitled to treat the certificates for a series of the Common Stock that
have not yet been surrendered for conversion as evidencing the ownership of
the number of whole shares of the kind or kinds of capital stock of the
Corporation for which the shares of such series of the Common Stock
represented by such certificates shall have been converted, notwithstanding
the failure to surrender such certificates.
(xii) The Corporation shall pay any and all documentary, stamp or
similar issue or transfer taxes that may be payable in respect of the
issuance or delivery of any shares of capital stock and/or other securities
upon conversion or redemption of shares of either series of the Common
Stock pursuant to this paragraph B(5) of this Article. The Corporation
shall not, however, be required to pay any tax that may be payable in
respect of any transfer involved in the issuance or delivery of any shares
of capital stock and/or other securities in a name other than that in which
the shares of such series of the Common Stock so converted or redeemed were
registered, and no such issuance or delivery shall be made unless and until
the person requesting such issuance or delivery has paid to the Corporation
the amount of any such tax or has established to the satisfaction of the
Corporation that such tax has been paid.
(xiii) Neither the failure to mail any notice required by this
paragraph B(5)(d) of this Article to any particular holder of the Common
Stock or of Convertible Securities nor any defect therein shall affect the
sufficiency thereof with respect to any other holder of outstanding shares
of the Common Stock or of Convertible Securities or the validity of any
such conversion or redemption.
(xiv) The Board of Directors may establish such rules and requirements
to facilitate the effectuation of the transactions contemplated by this
paragraph B(5) of this Article as the Board of Directors shall determine to
be appropriate.
(6) APPLICATION OF THE PROVISIONS OF THIS CERTIFICATE OF DESIGNATIONS.
(a) CERTAIN DETERMINATIONS BY THE BOARD OF DIRECTORS. The Board of
Directors shall make such determinations with respect to the assets and
liabilities to be attributed to the Groups, the application of the
provisions of this paragraph B of this Article to transactions to be
engaged in by the Corporation and the preferences, limitations and relative
rights of the holders of either series of the Common Stock, and the
qualifications and restrictions thereon, provided by these Amended and
Restated Articles of Incorporation as may be or become necessary or
appropriate to the exercise of such preferences, limitations and relative
rights, including, without limiting the foregoing, the determinations
referred to in the following paragraphs B(6)(a)(i), (ii), (iii), (iv) and
(v) of this Article. A record of any such determination shall be filed with
the records of the actions of the Board of Directors.
(i) Upon any acquisition by the Corporation or its subsidiaries of
any assets or business, or any assumption of liabilities, outside of the
ordinary course of business of the Circuit City Group or the CarMax
Group, as the case may be, the Board of Directors shall determine
whether such assets, business and liabilities (or an interest therein)
shall be for the benefit of the Circuit City Group or the CarMax Group
or that an interest therein shall be partly for the benefit of the
Circuit City Group and partly for the benefit of the CarMax Group and,
accordingly, shall be attributed to the Circuit City Group or the CarMax
Group, or partly to each, in accordance with paragraph B(7)(a) or (d) of
this Article, as the case may be.
(ii) Upon any issuance of any shares of CarMax Stock at a time when
the Number of Shares Issuable with Respect to the Inter-Group Interest
is greater than zero, the Board of Directors shall determine, based on
the use of the proceeds of such issuance and any other relevant factors,
whether all or any part of the shares of CarMax Stock so issued shall
reduce the Number of Shares Issuable with Respect to the Inter-Group
Interest, and the Number of Shares Issuable with Respect to the
Inter-Group Interest shall be adjusted accordingly.
(iii) Upon any issuance by the Corporation or any subsidiary
thereof of any Convertible Securities that are convertible into or
exchangeable or exercisable for shares of CarMax Stock, if at the time
such Convertible Securities are issued the Number of Shares Issuable
with Respect to the Inter-Group Interest is greater than zero, the Board
of Directors shall determine, based on the use of the proceeds of such
issuance of Convertible Securities in the business of the Circuit City
Group or the CarMax Group and any other relevant factors, whether, upon
conversion, exchange or exercise thereof, the issuance of shares of
CarMax Stock pursuant thereto shall, in whole or in part, reduce the
Number of Shares Issuable with Respect to the Inter-Group Interest.
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(iv) Upon any issuance of any shares of the Preferred Stock of any
series, the Board of Directors shall attribute, based on the use of
proceeds of such issuance of shares of the Preferred Stock in the
business of the Circuit City Group or the CarMax Group and any other
relevant factors, the shares so issued entirely to the Circuit City
Group or entirely to the CarMax Group or partly to the Circuit City
Group and partly to the CarMax Group in such proportion as the Board of
Directors shall determine.
(v) Upon any redemption or repurchase by the Corporation or any
subsidiary thereof of shares of the Preferred Stock of any class or
series or of other securities or debt obligations of the Corporation,
the Board of Directors shall determine, based on the property used to
redeem or purchase such shares, other securities or debt obligations,
which, if any, of such shares, other securities or debt obligations
redeemed or repurchased shall be attributed to the Circuit City Group
and which, if any, of such shares, other securities or debt obligations
shall be attributed to the CarMax Group and, accordingly, how many of
the shares of such series of the Preferred Stock or of such other
securities, or how much of such debt obligations, that remain
outstanding, if any, are thereafter attributed to the Circuit City Group
or to the CarMax Group.
(b) CERTAIN DETERMINATIONS NOT REQUIRED. Notwithstanding the foregoing
provisions of this paragraph B(6) of this Article, the provisions of
paragraphs B(7)(a), (c), (d) or (f) of this Article or any other provision
of this Article, at any time when there are not outstanding both (i) one or
more shares of Circuit City Stock or Convertible Securities convertible
into or exchangeable or exercisable for Circuit City Stock and (ii) one or
more shares of CarMax Stock or Convertible Securities convertible into or
exchangeable or exercisable for CarMax Stock, the Corporation need not (A)
attribute any of the assets or liabilities of the Corporation or any of its
subsidiaries to the Circuit City Group or the CarMax Group or (B) make any
determination required in connection therewith, nor shall the Board of
Directors be required to make any of the determinations otherwise required
by this Article, and in such circumstances the holders of the shares of
Circuit City Stock or CarMax Stock outstanding, as the case may be, shall
(unless otherwise specifically provided by these Amended and Restated
Articles of Incorporation) be entitled to all the preferences or other
relative rights of both series of the Common Stock without differentiation
between the Circuit City Stock and the CarMax Stock.
(c) BOARD DETERMINATIONS BINDING. Subject to applicable law, any
determinations made in good faith by the Board of Directors of the
Corporation under any provision of this paragraph B(6) of this Article or
otherwise in furtherance of the application of this Article shall be final
and binding on all shareholders.
(7) CERTAIN DEFINITIONS. As used in this Article, the following terms shall
have the following meanings (with terms defined in the singular having
comparable meaning when used in the plural and vice versa), unless the context
otherwise requires. As used in this paragraph B(7) of this Article, a
"contribution" or "transfer" of assets or properties from one Group to another
shall refer to the reattribution of such assets or properties from the
contributing or transferring Group to the other Group and correlative phrases
shall have correlative meanings.
(a) CARMAX GROUP shall mean, as of any date:
(i) all businesses, assets and liabilities of each of CarMax Auto
Superstores, Inc., a Virginia corporation, CarMax, Inc., a Virginia
corporation, and C-Max Auto Superstores, Inc., a California corporation
(the "CarMax Group Companies"), as of the date of the first issuance of
CarMax Stock;
(ii) all assets and liabilities of the Corporation and its
subsidiaries attributed by the Board of Directors to the CarMax Group,
whether or not such assets or liabilities are or were also assets and
liabilities of any of the CarMax Group Companies;
(iii) all properties and assets transferred to the CarMax Group
from the Circuit City Group (other than a transaction pursuant to
paragraph B(7)(a)(iv) of this Article) pursuant to transactions in the
ordinary course of business of both the Circuit City Group and the
CarMax Group or otherwise as the Board of Directors may have directed as
permitted by this Article;
(iv) all properties and assets transferred to the CarMax Group from
the Circuit City Group in connection with an increase in the Number of
Shares Issuable with respect to the Inter-Group Interest; and
(v) the interest of the Corporation or any of its subsidiaries in
any business or asset acquired and any liabilities assumed by the
Corporation or any of its subsidiaries outside of the ordinary course of
business and attributed to the CarMax Group, as determined by the Board
of Directors as contemplated by paragraph B(6)(a)(i) of this Article;
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provided that (1) from and after the payment date of any dividend or other
distribution with respect to shares of CarMax Stock (other than a dividend
or other distribution payable in shares of CarMax Stock, with respect to
which adjustment shall be made as provided in paragraph B(7)(s)(i) of this
Article, or in securities of the Corporation attributed to the CarMax
Group, for which provision shall be made as set forth in clause (2) of this
proviso), the CarMax Group shall no longer include an amount of assets or
properties previously attributed to the CarMax Group of the same kind as so
paid in such dividend or other distribution with respect of shares of
CarMax Stock as have a Fair Value on the record date for such dividend or
distribution equal to the product of (a) the Fair Value on such record date
of the aggregate of such dividend or distribution to holders of shares of
CarMax Stock declared multiplied by (b) a fraction the numerator of which
is equal to the Inter-Group Interest Fraction in effect on the record date
for such dividend or distribution and the denominator of which is equal to
the Outstanding CarMax Fraction in effect on the record date for such
dividend or distribution, (2) if the Corporation shall pay a dividend or
make some other distribution with respect to shares of CarMax Stock payable
in securities of the Corporation that are attributed to the CarMax Group
for purposes of this Article (other than CarMax Stock), there shall be
excluded from the CarMax Group an interest in the CarMax Group equivalent
to the number or amount of such securities that is equal to the product of
the number or amount of securities so distributed to holders of CarMax
Stock multiplied by the fraction specified in clause 1(b) of this proviso
(determined as of the record date for such distribution) (and such interest
in the CarMax Group shall be attributed to the Circuit City Group) and, to
the extent interest is or dividends are paid on the securities so
distributed, the CarMax Group shall no longer include a corresponding
ratable amount of the kind of assets paid as such interest or dividends as
would have been paid in respect of the securities equivalent to such
interest in the CarMax Group deemed held by the Circuit City Group if the
securities equivalent to such interest were outstanding (and in such
eventuality such assets as are no longer included in the CarMax Group shall
be attributed to the Circuit City Group) and (3) from and after any
transfer of any assets or properties from the CarMax Group to the Circuit
City Group, the CarMax Group shall no longer include such assets or
properties so contributed or transferred. The Corporation may also, to the
extent a dividend or distribution on the CarMax Stock has been paid in
Convertible Securities that are convertible into or exchangeable or
exercisable for CarMax Stock, cause such Convertible Securities as are
deemed to be held by the Circuit City Group in accordance with the third to
last sentence of paragraph B(7)(d) of this Article and clause (2) of the
proviso to the immediately preceding sentence to be deemed to be converted,
exchanged or exercised as provided in the penultimate sentence of paragraph
B(7)(d) of this Article, in which case such Convertible Securities shall no
longer be deemed to be held by the Circuit City Group.
(b) CARMAX GROUP AVAILABLE DIVIDEND AMOUNT, on any date, shall mean
the excess, if any, of
(i) the product of (x) the Outstanding CarMax Fraction and (y) an
amount equal to the total assets of the CarMax Group less its total
liabilities as of such date determined in accordance with generally
accepted accounting principles as in effect at such time applied on a
basis consistent with that applied in determining the CarMax Group Net
Earnings (Loss), over
(ii) except to the extent that this Article permits otherwise, the
amount that would be needed to satisfy the preferential rights to which
holders of any Preferred Stock attributed to the CarMax Group are
entitled upon dissolution of the Corporation;
provided, that such excess shall be reduced by an amount sufficient to
ensure that the CarMax Group would be able to pay its debts as they become
due in the usual course of business.
(c) CARMAX GROUP NET EARNINGS (LOSS), for any period through any date,
shall mean the net earnings or loss of the CarMax Group for such period (or
in respect of fiscal periods of the Corporation commencing prior to the
date of the first issuance of CarMax Stock, the pro forma net earnings or
loss of the CarMax Group for such period as if such date had been the first
day of such period) determined in accordance with generally accepted
accounting principles in effect at such time, reflecting income and expense
of the Corporation attributed to the CarMax Group on a basis substantially
consistent with attributions of income and expense made in the calculation
of the Circuit City Group Net Earnings (Loss), including, without
limitation, corporate administrative costs, net interest and other
financial costs and income taxes.
(d) CIRCUIT CITY GROUP shall mean, as of any date:
(i) the interest of the Corporation or any of its subsidiaries on
such date in all of the assets, liabilities and businesses of the
Corporation or any of its subsidiaries (and any successor companies),
other than any assets, liabilities and businesses attributed in
accordance with this Article to the CarMax Group;
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(ii) a proportionate undivided interest in each and every business,
asset and liability attributed to the CarMax Group equal to the
Inter-Group Interest Fraction as of such date;
(iii) all properties and assets transferred to the Circuit City
Group from the CarMax Group (other than pursuant to paragraph
B(7)(d)(iv) or (vi) of this Article) pursuant to transactions in the
ordinary course of business of both the Circuit City Group and the
CarMax Group or otherwise as the Board of Directors may have directed as
permitted by this Article;
(iv) all properties and assets transferred to the Circuit City
Group from the CarMax Group in connection with a reduction of the Number
of Shares Issuable with Respect to the Inter-Group Interest;
(v) the interest of the Corporation or any of its subsidiaries in
any business or asset acquired and any liabilities assumed by the
Corporation or any of its subsidiaries outside the ordinary course of
business and attributed to the Circuit City Group, as determined by the
Board of Directors as contemplated by paragraph B(6)(a)(i) of this
Article; and
(vi) from and after the payment date of any dividend, redemption or
other distribution with respect to shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock, with
respect to which adjustment shall be made as provided in paragraph
B(7)(s)(i) of this Article, or in securities of the Corporation
attributed to the CarMax Group, for which provision shall be made as set
forth in the third to last sentence of this definition), an amount of
assets or properties previously attributed to the CarMax Group of the
same kind as were paid in such dividend or other distribution with
respect to shares of CarMax Stock as have a Fair Value on the record
date for such dividend or distribution equal to the product of (1) the
Fair Value on such record date of the aggregate of such dividend or
distribution to holders of shares of CarMax Stock declared multiplied by
(2) a fraction the numerator of which is equal to the Inter-Group
Interest Fraction in effect on the record date for such dividend or
distribution and the denominator of which is equal to the Outstanding
CarMax Fraction in effect on the record date for such dividend or
distribution;
provided that from and after any transfer of any assets or properties from
the Circuit City Group to the CarMax Group, the Circuit City Group shall no
longer include such assets or properties so transferred (other than as
reflected in respect of such a transfer by the Inter-Group Interest
Fraction, as provided by paragraph B(7)(d)(ii) of this Article).
If the Corporation shall pay a dividend or make some other
distribution with respect to shares of CarMax Stock payable in securities
of the Corporation that are attributed to the CarMax Group for purposes of
this Article (other than CarMax Stock), the Circuit City Group shall be
deemed to hold an interest in the CarMax Group equivalent to the number or
amount of such securities that is equal to the product of the number or
amount of securities so distributed to holders of CarMax Stock multiplied
by the fraction specified in clause (2) of paragraph B(7)(d)(vi) of this
Article (determined as of the record date for such distribution) and, to
the extent interest is or dividends are paid on the securities so
distributed, the Circuit City Group shall include, and there shall be
transferred thereto from the CarMax Group, a corresponding ratable amount
of the kind of assets paid as such interest or dividends as would have been
paid in respect of such securities so deemed to be held by the Circuit City
Group if such securities were outstanding. The Corporation may also, to the
extent the securities so paid as a dividend or other distribution to the
holders of CarMax Stock are Convertible Securities and at the time are
convertible into or exchangeable or exercisable for shares of CarMax Stock,
treat such Convertible Securities as are so deemed to be held by the
Circuit City Group to be deemed to be converted, exchanged or exercised,
and shall do so to the extent such Convertible Securities are mandatorily
converted, exchanged or exercised (and to the extent the terms of such
Convertible Securities require payment of consideration for such
conversion, exchange or exercise, the Circuit City Group shall then no
longer include an amount of the kind of properties or assets required to be
paid as such consideration for the amount of Convertible Securities deemed
converted, exchanged or exercised (and the CarMax Group shall be attributed
such properties or assets)), in which case, from and after such time, the
securities into or for which such Convertible Securities so deemed to be
held by the Circuit City Group were so considered converted, exchanged or
exercised shall be deemed held by the Circuit City Group (as provided in
clause (3) of paragraph B(7)(s)(iii) of this Article) and such Convertible
Securities shall no longer be deemed to be held by the Circuit City Group.
A statement setting forth the election to effectuate any such deemed
conversion, exchange or exercise of Convertible Securities so deemed to be
held by the Communication Group and the properties or assets, if any, to be
attributed to the CarMax Group in consideration of such conversion,
exchange or exercise (if any) shall be filed in the records of the actions
of the Board of Directors and, upon such filing, such deemed conversion,
exchange or exercise shall be effectuated.
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<PAGE>
(e) CIRCUIT CITY GROUP AVAILABLE DIVIDEND AMOUNT, on any date, shall
mean the excess, if any, of:
(i) an amount equal to the total assets of the Circuit City Group
less its total liabilities as of such date determined in accordance with
generally accepted accounting principles as in effect at such time
applied on a basis consistent with that applied in determining the
Circuit City Group Net Earnings (Loss), over
(ii) except to the extent that these Amended and Restated Articles
of Incorporation permit otherwise, the amount that would be needed to
satisfy the preferential rights to which holders of any Preferred Stock
attributed to the Circuit City Group are entitled upon dissolution of
the Corporation;
provided, that such excess shall be reduced by an amount sufficient to
ensure that the Circuit City Group would be able to pay its debts as they
become due in the usual course of business.
(f) CIRCUIT CITY GROUP NET EARNINGS (LOSS), for any period through any
date, shall mean the net earnings or loss of the Circuit City Group for
such period (or in respect of fiscal periods of the Corporation commencing
prior to the date of the first issuance of CarMax Stock, the pro forma net
earnings or loss of the Circuit City Group for such period as if such date
had been the first day of such period) determined in accordance with
generally accepted accounting principles in effect at such time, reflecting
income and expense of the Corporation attributed to the Circuit City Group
on a basis substantially consistent with attributions of income and expense
made in the calculation of CarMax Group Net Earnings (Loss), including,
without limitation, corporate administrative costs, net interest and other
financial costs and income taxes.
(g) COMMON STOCK shall mean the collective reference to the Circuit
City Stock and the CarMax Stock, and either may sometimes be called a
series of Common Stock.
(h) CONVERSION DATE shall mean the date fixed by the Board of
Directors as the effective date for the conversion of shares of Circuit
City Stock or CarMax Stock, as the case may be, into shares of CarMax Stock
or Circuit City Stock, respectively (or another class or series of common
stock of the Corporation, as the case may be) as shall be set forth in the
notice to holders of shares of the series of Common Stock subject to such
conversion and to holders of any Convertible Securities that are
convertible into or exchangeable or exercisable for shares of the series of
Common Stock subject to such conversion required pursuant to paragraph
B(5)(d)(v) of this Article.
(i) CONVERTIBLE SECURITIES at any time shall mean any securities of
the Corporation or of any subsidiary thereof (other than shares of the
Common Stock), including warrants and options, outstanding at such time
that by their terms are convertible into or exchangeable or exercisable for
or evidence the right to acquire any shares of either series of the Common
Stock, whether convertible, exchangeable or exercisable at such time or a
later time or only upon the occurrence of certain events, but in respect of
antidilution provisions of such securities only upon the effectiveness
thereof.
(j) DISPOSITION shall mean a sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of
assets or stock or otherwise) of properties or assets (including stock,
other securities and goodwill).
(k) FAIR VALUE shall mean, (i) in the case of equity securities or
debt securities of a class or series that has previously been Publicly
Traded for a period of at least 15 months, the Market Value thereof (if
such Market Value, as so defined, can be determined); (ii) in the case of
an equity security or debt security that has not been Publicly Traded for
at least 15 months or the Market Value of which cannot be determined, the
fair value per share of stock or per other unit of such security, on a
fully distributed basis, as determined by an independent investment banking
firm experienced in the valuation of securities selected in good faith by
the Board of Directors, or, if no such investment banking firm is, as
determined in the good faith judgment of the Board of Directors, available
to make such determination, in good faith by the Board of Directors; (iii)
in the case of cash denominated in U.S. dollars, the face amount thereof
and in the case of cash denominated in other than U.S. dollars, the face
amount thereof converted into U.S. dollars at the rate published in The
Wall Street Journal on the date for the determination of Fair Value or, if
not so published, at such rate as shall be determined in good faith by the
Board of Directors based upon such information as the Board of Directors
shall in good faith determine to be appropriate in accordance with good
business practice; and (iv) in the case of property other than securities
or cash, the "Fair Value" thereof shall be determined in good faith by the
Board of Directors based upon such appraisals or valuation reports of such
independent experts as the Board of Directors shall in good faith determine
to be appropriate in accordance with good business practice. Any such
determination of Fair Value shall be described in a statement filed with
the records of the actions of the Board of Directors.
(l) GROUP shall mean, as of any date, the Circuit City Group or the
CarMax Group, as the case may be.
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(m) INTER-GROUP INTEREST FRACTION as of any date shall mean a fraction
the numerator of which shall be the Number of Shares Issuable with Respect
to the Inter-Group Interest on such date and the denominator of which shall
be the sum of (A) such Number of Shares Issuable with Respect to the
Inter-Group Interest and (B) the aggregate number of shares of CarMax Stock
outstanding on such date. A statement setting forth the Inter-Group
Interest Fraction as of the record date for any dividend or distribution on
either series of the Common Stock, as of the effective date of any
conversion, exchange or exercise of Convertible Securities into or for
shares of CarMax Stock and as of the end of each fiscal quarter of the
Corporation shall be filed by the Secretary of the Corporation in the
records of the Board of Directors of the Corporation not later than ten
days after such date.
(n) MARKET CAPITALIZATION of any class or series of common stock on
any date shall mean the product of (i) the Market Value of one share of
such class or series of common stock on such date and (ii) the number of
shares of such class or series of common stock outstanding on such date.
(o) MARKET VALUE of a share of any class or series of capital stock of
the Corporation on any day shall mean the average of the high and low
reported sales prices regular way of a share of such class or series on
such Trading Day or, in case no such reported sale takes place on such
Trading Day, the average of the reported closing bid and asked prices
regular way of a share of such class or series on such Trading Day, in
either case as reported on the New York Stock Exchange Composite Tape or,
if the shares of such class or series are not listed or admitted to trading
on such Exchange on such Trading Day, on the principal national securities
exchange in the United States on which the shares of such class or series
are listed or admitted to trading or, if not listed or admitted to trading
on any national securities exchange on such Trading Day, on The Nasdaq
National Market or, if the shares of such class or series are not listed or
admitted to trading on any national securities exchange or quoted on The
Nasdaq National Market on such Trading Day, the average of the closing bid
and asked prices of a share of such class or series in the over-the-counter
market on such Trading Day as furnished by any New York Stock Exchange
member firm selected from time to time by the Corporation or, if such
closing bid and asked prices are not made available by any such New York
Stock Exchange member firm on such Trading Day, the Fair Value of a share
of such class or series as set forth in clause (ii) of the definition of
Fair Value; provided that, for purposes of determining the market value of
a share of any class or series of capital stock for any period, (i) the
"Market Value" of a share of capital stock on any day prior to any
"ex-dividend" date or any similar date occurring during such period for any
dividend or distribution (other than any dividend or distribution
contemplated by clause (ii)(B) of this sentence) paid or to be paid with
respect to such capital stock shall be reduced by the Fair Value of the per
share amount of such dividend or distribution and (ii) the "Market Value"
of any share of capital stock on any day prior to (A) the effective date of
any subdivision (by stock split or otherwise) or combination (by reverse
stock split or otherwise) of outstanding shares of such class or series of
capital stock occurring during such period or (B) any "ex-dividend" date or
any similar date occurring during such period for any dividend or
distribution with respect to such capital stock to be made in shares of
such class or series of capital stock or Convertible Securities that are
convertible, exchangeable or exercisable for such class or series of
capital stock shall be appropriately adjusted, as determined by the Board
of Directors, to reflect such subdivision, combination, dividend or
distribution.
(p) MARKET VALUE RATIO OF THE CARMAX STOCK TO THE CIRCUIT CITY STOCK
as of any date shall mean the fraction (which may be greater or less than
1/1), expressed as a decimal (rounded to the nearest five decimal places),
of a share of Circuit City Stock (or another class or series of common
stock of the Corporation, if so provided by paragraph B(5)(a) of this
Article because Circuit City Stock is not then Publicly Traded) to be
issued in respect of a share of CarMax Stock upon a conversion of CarMax
Stock into Circuit City Stock (or another class or series of common stock
of the Corporation) in accordance with paragraph B(5)(a) of this Article,
based on the ratio of the Market Value of a share of CarMax Stock to the
Market Value of a share of Circuit City Stock (or such other common stock)
as of such date, determined by the fraction the numerator of which shall be
the sum of (A) four times the average Market Value of one share of CarMax
Stock over the period of five consecutive Trading Days ending on such date,
(B) three times the average Market Value of one share of CarMax Stock over
the period of five consecutive Trading Days ending on the fifth Trading Day
prior to such date, (C) two times the average Market Value of one share of
CarMax Stock over the period of five consecutive Trading Days ending on the
10th Trading Day prior to such date and (D) the average Market Value of one
share of CarMax Stock over the period of five consecutive Trading Days
ending on the 15th Trading Day prior to such date and the denominator of
which shall be the sum of (A) four times the average Market Value of one
share of Circuit City Stock (or such other common stock) over the period of
five consecutive Trading Days ending on such date, (B) three times the
average Market Value of one share of Circuit City Stock (or such other
common stock) over the period of five consecutive Trading Days ending on
the fifth Trading Day prior to such date, (C) two times the average Market
Value of one share of Circuit City Stock (or such other common stock) over
the period of five consecutive Trading Days ending on
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the 10th Trading Day prior to such date and (D) the average Market Value of
one share of Circuit City Stock (or such other common stock) over the
period of five consecutive Trading Days ending on the 15th Trading Day
prior to such date.
(q) MARKET VALUE RATIO OF THE CIRCUIT CITY STOCK TO THE CARMAX STOCK
as of any date shall mean the fraction (which may be greater or less than
1/1), expressed as a decimal (rounded to the nearest five decimal places),
of a share of CarMax Stock (or another class or series of common stock of
the Corporation, if so provided by paragraph B(5)(a) of this Article
because CarMax Stock is not then Publicly Traded) to be issued in respect
of a share of Circuit City Stock upon a conversion of Circuit City Stock
into CarMax Stock (or another class or series of common stock of the
Corporation) in accordance with paragraph B(5)(a) of this Article, based on
the ratio of the Market Value of a share of Circuit City Stock to the
Market Value of a share of CarMax Stock (or such other common stock) as of
such date, determined by the fraction the numerator of which shall be the
sum of (A) four times the average Market Value of one share of Circuit City
Stock over the period of five consecutive Trading Days ending on such date,
(B) three times the average Market Value of one share of Circuit City Stock
over the period of five consecutive Trading Days ending on the fifth
Trading Day prior to such date, (C) two times the average Market Value of
one share of Circuit City Stock over the period of five consecutive Trading
Days ending on the 10th Trading Day prior to such date and (D) the average
Market Value of one share of Circuit City Stock over the period of five
consecutive Trading Days ending on the 15th Trading Day prior to such date
and the denominator of which shall be the sum of (A) four times the average
Market Value of one share of CarMax Stock (or such other common stock) over
the period of five consecutive Trading Days ending on such date, (B) three
times the average Market Value of one share of CarMax Stock (or such other
common stock) over the period of five consecutive Trading Days ending on
the fifth Trading Day prior to such date, (C) two times the average Market
Value of one share of CarMax Stock (or such other common stock) over the
period of five consecutive Trading Days ending on the 10th Trading Day
prior to such date and (D) the average Market Value of one share of CarMax
Stock (or such other common stock) over the period of five consecutive
Trading Days ending on the 15th Trading Day prior to such date.
(r) NET PROCEEDS shall mean, as of any date with respect to any
Disposition of any of the properties and assets attributed to the Circuit
City Group or the CarMax Group, as the case may be, an amount, if any,
equal to what remains of the gross proceeds of such Disposition after
payment of, or reasonable provision is made as determined by the Board of
Directors for, (A) any taxes payable by the Corporation (or which would
have been payable but for the utilization of tax benefits attributable to
the other Group) in respect of such Disposition or in respect of any
resulting dividend or redemption pursuant to paragraphs B(5)(a)(i)(1)(a) or
(b) of this Article, (B) any transaction costs, including, without
limitation, any legal, investment banking and accounting fees and expenses
and (C) any liabilities (contingent or otherwise) of or attributed to such
Group, including, without limitation, any liabilities for deferred taxes or
any indemnity or guarantee obligations of the Corporation incurred in
connection with the Disposition or otherwise, and any liabilities for
future purchase price adjustments and any preferential amounts plus any
accumulated and unpaid dividends in respect of the Preferred Stock
attributed to such Group. For purposes of this definition, any properties
and assets attributed to the Group, the properties and assets of which are
subject to such Disposition, remaining after such Disposition shall
constitute "reasonable provision" for such amount of taxes, costs and
liabilities (contingent or otherwise) as the Board of Directors determines
can be expected to be supported by such properties and assets.
(s) NUMBER OF SHARES ISSUABLE WITH RESPECT TO THE INTER-GROUP INTEREST
shall be determined by the Board of Directors prior to the first issuance
of shares of CarMax Stock to be the number of shares of CarMax Stock that
initially represents 100% of the common shareholders' equity of the
Corporation attributable to the CarMax Group, which determination shall be
set forth in a statement filed with the records of the actions of the Board
of Directors; provided, however, that such number shall from time to time
thereafter be:
(i) adjusted, if before such adjustment such number is greater than
zero, as determined by the Board of Directors to be appropriate to
reflect equitably any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of the CarMax Stock or
any dividend or other distribution of shares of CarMax Stock to holders
of shares of CarMax Stock or any reclassification of CarMax Stock;
(ii) decreased (but to not less than zero), if before such
adjustment such number is greater than zero, by action of the Board of
Directors by (1) the number of shares of CarMax Stock issued or sold by
the Corporation that, immediately prior to such issuance or sale, were
included in the Number of Shares Issuable with Respect to the
Inter-Group Interest, (2) the number of shares of CarMax Stock issued
upon conversion, exchange or exercise of Convertible Securities that,
immediately prior to the issuance or sale of such Convertible
Securities, were included
II-A-17
<PAGE>
in the Number of Shares Issuable with Respect to the Inter-Group
Interest, (3) the number of shares of CarMax Stock issued by the
Corporation as a dividend or other distribution (including in connection
with any reclassification or exchange of shares) to holders of Circuit
City Stock, (4) the number of shares of CarMax Stock issued upon the
conversion, exchange or exercise of any Convertible Securities issued by
the Corporation as a dividend or other distribution (including in
connection with any reclassification or exchange of shares) to holders
of Circuit City Stock, or (5) the number (rounded, if necessary, to the
nearest whole number) equal to the quotient of (a) the aggregate Fair
Value as of the date of contribution of properties or assets (including
cash) transferred from the CarMax Group to the Circuit City Group in
consideration for a reduction in the Number of Shares Issuable with
Respect to the Inter-Group Interest divided by (b) the Market Value of
one share of CarMax Stock as of the date of such transfer; and
(iii) increased by (1) the number of outstanding shares of CarMax
Stock repurchased by the Corporation for consideration that is
attributed as provided by paragraph B(7)(d) of this Article to the
Circuit City Group and (2) the number (rounded, if necessary, to the
nearest whole number) equal to the quotient of (a) the Fair Value of
properties or assets (including cash) theretofore attributed as provided
by paragraph B(7)(d) of this Article to the Circuit City Group that are
contributed to the CarMax Group in consideration of an increase in the
Number of Shares Issuable with Respect to the Inter-Group Interest,
divided by (b) the Market Value of one share of CarMax Stock as of the
date of such contribution and (3) the number of shares of CarMax Stock
into or for which Convertible Securities are deemed converted, exchanged
or exercised pursuant to the penultimate sentence of the definition of
"Circuit City Group" in paragraph B(7)(d) of this Article.
(t) OUTSTANDING CARMAX FRACTION, as of any date, means the fraction
(which may simplify to 1/1) the numerator of which shall be the number of
shares of CarMax Stock outstanding on such date and the denominator of
which shall be the sum of the number of shares of CarMax Stock outstanding
on such date and the Number of Shares Issuable with Respect to the
Inter-Group Interest on such date. A statement setting forth the
Outstanding CarMax Fraction as of the record date for the payment of any
dividend or distribution on either series of the Common Stock and as of the
end of each fiscal quarter of the Corporation shall be filed by the
Secretary of the Corporation in the records of the actions of the Board of
Directors not later than ten days after such date.
(u) PUBLICLY TRADED with respect to any security shall mean (i)
registered under Section 12 of the Securities Exchange Act of 1934, as
amended (or any successor provision of law), and (ii) listed for trading on
the New York Stock Exchange or the American Stock Exchange (or any national
securities exchange registered under Section 7 of the Securities Exchange
Act of 1934, as amended (or any successor provision of law), that is the
successor to either such exchange) or listed on The Nasdaq Stock Market (or
any successor market system).
(v) REDEMPTION DATE shall mean the date fixed by the Board of
Directors as the effective date for a redemption of shares of either series
of the Common Stock, as set forth in a notice to holders thereof required
pursuant to paragraphs B(5)(d)(iii), (iv) or (vi) of this Article.
(w) RELATED BUSINESS TRANSACTION means any Disposition of all or
substantially all the properties and assets attributed to the Circuit City
Group or the CarMax Group, as the case may be, in a transaction or series
of related transactions that result in the Corporation receiving in
consideration of such properties and assets primarily equity securities
(including, without limitation, capital stock, debt securities convertible
into or exchangeable for equity securities or interests in a general or
limited partnership or limited liability company, without regard to the
voting power or other management or governance rights associated therewith)
of any entity which (i) acquires such properties or assets or succeeds (by
merger, formation of a joint venture or otherwise) to the business
conducted with such properties or assets or controls such acquiror or
successor and (ii) is primarily engaged or proposes to engage primarily in
one or more businesses similar or complementary to the businesses conducted
by such Group prior to such Disposition, as determined by the Board of
Directors.
(x) TRADING DAY shall mean each weekday other than any day on which
the relevant series of common stock of the Corporation is not traded on any
national securities exchange or quoted on The Nasdaq National Market or in
the over-the-counter market."
II-A-18
<PAGE>
AMENDMENT TO ARTICLES OF INCORPORATION
RELATING TO REDESIGNATION OF EXISTING COMMON STOCK
TO BE ADOPTED BY SHAREHOLDERS
Article V of the Articles is proposed to be further amended by adding
thereto a new Section C immediately following Section B of Article V, to
read in its entirety as follows:
"C. REDESIGNATION OF EXISTING COMMON STOCK. As of the effective date
of the Articles of Amendment pursuant to which this Section C is added to
these 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 then issued shall automatically be redesignated,
changed and converted into one fully paid and nonassessable share of
Circuit City Stock."
II-A-19
<PAGE>
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<PAGE>
ANNEX II-B
PROPOSAL 2
AMENDMENT TO ARTICLES OF INCORPORATION
RELATING TO INCREASED AUTHORIZATION OF
COMMON STOCK
Section A of Article III of the Articles of Incorporation is proposed
to be amended and restated in its entirety as follows:
"A. AUTHORIZED STOCK. The aggregate number of shares that the
Corporation shall have authority to issue and the par value per share are
as follows:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES PAR VALUE
- ------------------------ ---------------- ---------
<S> <C> <C>
Preferred 2,000,000 $ 20.00
Common 350,000,000 $ .50"
</TABLE>
II-B-1
<PAGE>
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<PAGE>
ANNEX II-C
PROPOSAL 3
AMENDMENTS TO ARTICLES OF INCORPORATION
RELATING TO ISSUANCE OF PREFERRED STOCK IN SERIES
BY ACTION OF THE BOARD OF DIRECTORS AND
DELETION OF EXPIRED PROVISIONS
Section A(2) of Article IV of the Articles is proposed to be amended and
restated in its entirety, as follows:
"(2) ARTICLES OF AMENDMENT. Before the issuance of any shares of a
series of the Preferred Stock (other than shares for which provision is
already made in these Amended and Restated Articles of Incorporation),
Articles of Amendment establishing such series shall be filed with and made
effective by the State Corporation Commission of Virginia, as required by
law."
Paragraph (a) of Section A(5) of Article IV of the Articles is proposed to
be amended and restated in its entirety, as follows:
"(a) The holders of outstanding shares of each series of the Preferred
Stock shall be entitled to receive, if, when and as declared by the Board
of Directors, out of funds legally available therefor, cash dividends in
accordance with the terms set forth in the amendment to these Amended and
Restated Articles of Incorporation establishing such series."
Section A(6) of Article IV of the Articles is proposed to be amended and
restated in its entirety, as follows:
"(6) VOTING RIGHTS. No holder of outstanding shares of any series of
the Preferred Stock shall be entitled to vote for the election of directors
or upon any other matter, or to receive notice of or to participate in any
meeting of the stockholders of the Corporation, except (i) as hereinafter
provided or as provided in the amendment to these Amended and Restated
Articles of Incorporation establishing such series and (ii) as may be
required by law."
Paragraph (a) of Section A(7) of Article IV of the Articles is proposed to
be amended and restated in its entirety, as follows:
"(a) Redemptions of outstanding shares of any series of the Preferred
Stock shall be made pursuant to the terms and conditions set forth in these
Amended and Restated Articles of Incorporation or in the amendment thereto
establishing such series and, unless they provide otherwise, shall be made
in the manner hereinbelow set forth."
The second sentence of paragraph (b) of Section A(7) of Article IV of the
Articles is proposed to be amended and restated in its entirety, as follows:
"The notice of Redemption shall set forth the paragraph or paragraphs of
these Amended and Restated Articles of Incorporation (or the amendment
thereto establishing the series of which such shares are a part) pursuant
to which the shares are being redeemed, the number of shares to be
redeemed, the date fixed for Redemption, the Redemption Price, and the
place or places where certificates representing shares to be redeemed may
be surrendered."
Paragraph (e) of Section A(7) of Article IV of the Articles is proposed to
be amended and restated in its entirety, as follows:
"(e) Shares of any series of the Preferred Stock purchased, redeemed
or otherwise acquired by the Corporation shall constitute authorized but
unissued shares of Preferred Stock but undesignated as to series, as
provided by law, and, unless otherwise provided in these Amended and
Restated Articles of Incorporation or in the amendment thereto establishing
such series of the Preferred Stock, may be reissued by the Corporation."
The second sentence of Section A(9) of Article IV of the Articles is
proposed to be amended and restated in its entirety, as follows:
"In the event that any of the foregoing provisions of these Amended and
Restated Articles of Incorporation conflict with the provisions of the
amendment thereto establishing a series of the Preferred Stock, then, as to
such series, the specific provisions which relate to it, and not the
general provisions hereinabove set forth, shall control."
Article VII of the Articles is proposed to be deleted in its entirety.
II-C-1
<PAGE>
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<PAGE>
ANNEX III
CIRCUIT CITY STORES, INC.
1994 STOCK INCENTIVE PLAN
(AS PROPOSED TO BE AMENDED)
(PROPOSED AMENDMENTS ARE SET FORTH IN BOLD TYPE AND UNDERLINED;
PROPOSED DELETIONS ARE MARKED THROUGH)
1. PURPOSE. The purpose of this Circuit City Stores, Inc. 1994 Stock
Incentive Plan (the "Plan") is to further the long term stability and financial
success of Circuit City Stores, 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 aggregate amount of federal,
state and local income and payroll taxes that the Company is required to
withhold in connection with any exercise of a Nonstatutory Stock Option or Stock
Appreciation Right, or the award of Restricted Stock.
(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) "Committee" means the committee appointed by the Board as described
under Section 14.
(g) "Company" means Circuit City Stores, Inc., a Virginia corporation.
(h) "Company Stock" means shares of [voting common stock of the Company,]
{CIRCUIT CITY STOCK OR SHARES OF CARMAX STOCK AS DETERMINED IN THE DISCRETION OF
THE COMMITTEE, SUBJECT TO THE LIMITS OF SECTION 4. SUCH SHARES SHALL BE} subject
to adjustment as provided in Section 13.
(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.
(n) "Insider" means a person subject to section 16(b) of the Act.
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<PAGE>
(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 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 already owned Company Stock 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) "Retirement Date" means, with respect to a Participant, the earliest
date on which the Participant is eligible to retire under a qualified Code
section 401(a) plan of the Company, or, if there is no such plan, age 65.
(x) "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.
(y) "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.
(z) "Subsidiary" means, with respect to any corporation, a subsidiary of
that corporation within the meaning of Code section 424(f).
(aa) "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 Insiders or 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 {(i)} an aggregate of five million five hundred thousand
(5,500,000) shares of {CIRCUIT CITY} [Company] Stock, {AND (ii) AN AGGREGATE OF
FIVE MILLION SEVEN HUNDRED THOUSAND (5,700,000) SHARES OF CARMAX STOCK, ALL OF}
which shall be authorized, but unissued shares. No more than one million five
hundred thousand (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 CIRCUIT CITY STOCK} that have not been issued and shares {OF
CIRCUIT CITY STOCK} allocated to options or portions thereof that expire or
otherwise terminate unexercised after the effective date of the Plan under the
Circuit City Stores, Inc. 1986 Stock Incentive Plan (the "1986 Plan") and the
Circuit City Stores, Inc. 1988 Stock Incentive Plan (the "1988 Plan") 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[, to the extent permitted by Rule 16b-3] again be subjected to an
Incentive Award under the Plan {RELATING TO SHARES OF THE SAME SERIES OF COMPANY
STOCK AS THOSE REACQUIRED}. An Incentive Award to a Participant may be
conditioned upon the surrender for cancellation of an option granted under the
1986 Plan, the 1988 Plan or an existing Incentive Award. For purposes of
determining the number of shares {OF COMPANY STOCK} that are available for
Incentive Awards under the Plan, such number shall [to the extent permissible
under Rule 16b-3,] include the number of shares {OF SUCH SERIES OF COMPANY
STOCK} surrendered by an optionee or retained by the Company in payment {OF
APPLICABLE WITHHOLDING TAXES} [of federal and state income tax withholding
liabilities] upon exercise of an Option.
III-2
<PAGE>
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, when
accepted in writing by the Participant, shall become an 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.
(f) Each Participant shall agree at the time his Restricted Stock Award is
granted, and as a condition thereof, that the Company shall deduct from any
payments of any kind otherwise due from the Company to such Participant the
aggregate amount of any federal, state or local taxes of any kind required by
law to be withheld with respect to the shares of Restricted Stock subject to the
Restricted Stock Award or that such Participant will pay to the Company, or make
arrangements satisfactory to the Company regarding the payment to the Company
of, the aggregate amount of any such taxes. Arrangements satisfactory to the
Company may, in the sole discretion of the Company, include the obtaining of a
loan from the Company to pay such 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
III-3
<PAGE>
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, the
Committee may establish procedures permitting the Participant to elect to (a)
deliver shares of already owned Company Stock or (b) have the Company retain
that number of shares of Company Stock that would satisfy all or a specified
portion of the federal, state and local tax liabilities of the Participant
arising in the year the Incentive Award becomes subject to tax. 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. {ANY SHARES OF ALREADY OWNED COMPANY STOCK
THAT ARE DELIVERED BY A PARTICIPANT TO SATISFY ALL OR A SPECIFIED PORTION OF THE
APPLICABLE WITHHOLDING TAXES SHALL BE OF THE SAME SERIES OF COMPANY STOCK AS THE
SHARES OF COMPANY STOCK TO WHICH SUCH INCENTIVE AWARD RELATES.}
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, when duly accepted
in writing by the eligible employee, shall become a 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 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 an Incentive Stock Option that is exercisable (in whole or in part),
the Participant may exercise any or all of the 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 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 "). The
foregoing Limitation Amount is intended to comply with Section 422 of the
Internal Revenue Code; if
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<PAGE>
the Internal Revenue Code should be amended to increase the limitation
contained in Section 422, the foregoing Limitation Amount shall also be
automatically increased. Incentive Stock Options granted after December 31,
1986 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
exceed the Limitation Amount, the excess Options will be treated as
Nonstatutory Stock Options to the extent permitted by law.
(e) Notwithstanding the foregoing, no Option shall be exercisable by an
Insider within the first six months after it is granted; provided that this
restriction shall not apply if the Participant becomes Disabled or dies during
the six-month period.
(f) 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;
(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, except that in no event
shall a Stock Appreciation Right held by an Insider be exercisable within
the first six months after it is awarded even though the related Option is
or becomes 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. The following provisions apply to all Stock Appreciation
Rights that are granted without related Options:
III-5
<PAGE>
(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 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 except that in no event shall a Stock
Appreciation Right held by an Insider be exercisable within the first six
months after it is awarded.
(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.
(d) Except in the case of Stock Appreciation Rights which by their terms
are exercisable only during a specified period following a Change of Control,
which period does not exceed 90 days, an Insider may only exercise a Stock
Appreciation Right during the period beginning on the third business day and
ending on the twelfth business day following the release for publication of
quarterly or annual summary statements of the Company's sales and earnings. The
release for publication shall be deemed to have occurred if the specified
financial data (i) appears on a wire service, (ii) appears in a financial news
service, (iii) appears in a newspaper of general circulation, or (iv) is
otherwise made publicly available.
An Insider may exercise a Stock Appreciation Right which is by its terms
exercisable only during a specified period following a Change of Control, which
period does not exceed 90 days, during the period specified therein, provided
that no Stock Appreciation Right held by an Insider shall be exercisable by its
terms within the first six months after it is granted.
9. METHOD OF EXERCISE OF OPTIONS AND STOCK APPRECIATION RIGHTS.
(a) Options and Stock Appreciation Rights may be exercised by the employee
giving written 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, the employee 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, (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.
(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) As an alternative to making a cash payment to the Company to satisfy
Applicable Withholding Taxes, the Committee may establish procedures permitting
the Participant to elect to (a) deliver shares of already owned Company Stock or
(b) have the Company retain that number of shares of Company Stock that would
satisfy all or a specified portion of the federal, state and local tax
liabilities of the Participant arising in the year the Incentive Award becomes
subject to tax. Any such election shall be made only in accordance with
procedures established by the Committee.
III-6
<PAGE>
(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 already owned shares of Company Stock 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;
(v) The Reload Option shall not have a Reload Feature.
{(F) 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, OR TO SATISFY ALL OR A SPECIFIED PORTION OF THE APPLICABLE WITHHOLDING
TAXES, SHALL BE OF THE SAME SERIES OF COMPANY STOCK AS THE SHARES OF COMPANY
STOCK TO WHICH SUCH INCENTIVE AWARD RELATES.}
10. NONTRANSFERABILITY OF INCENTIVE AWARDS. Incentive Awards shall not be
transferrable 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.
11. EFFECTIVE DATE OF THE PLAN. This Plan shall be effective as of February
15, 1994, and shall be submitted to the shareholders of the Company for
approval. 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.
12. TERMINATION, MODIFICATION, CHANGE. If not sooner terminated by the
Board, this Plan shall terminate at the close of business on February 14, 2004.
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, or materially increases the benefits accruing to
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 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) 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 Committee should the Company effect one or more stock dividends,
III-7
<PAGE>
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 Committee 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 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.
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 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 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 and 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) procedures for the withholding or
delivery of Company Stock 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.
{IN ADDITION, THE COMMITTEE SHALL HAVE THE POWER AND DISCRETION TO CONVERT OR
EXCHANGE INCENTIVE AWARDS THAT WERE GRANTED PRIOR TO THE FIRST ISSUANCE OF
CARMAX STOCK TO THE PUBLIC UNDER OTHER INCENTIVE ARRANGEMENTS MAINTAINED BY THE
COMPANY OR ITS SUBSIDIARIES INTO OR FOR INCENTIVE AWARDS OF SHARES OF CARMAX
STOCK UNDER THIS PLAN. SUCH CONVERSIONS OR EXCHANGES SHALL BE SUBJECT TO THE
LIMIT ON THE MAXIMUM NUMBER OF SHARES OF CARMAX STOCK THAT MAY BE ALLOCATED TO
INCENTIVE AWARDS DESCRIBED IN SECTION 4(A) OF THE PLAN.} 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.
(e) All members of the Committee must be "outside directors" as described
in Code section 162(m). In addition, no member of the Committee shall be
eligible to receive any Incentive Award under the Plan or to participate in any
other plan of the Company or any Parent or Subsidiary of the Company that
entitles participants to acquire stock, stock options or stock
III-8
<PAGE>
appreciation rights or other equity securities of the Company or any Parent or
Subsidiary of the Company except for the 1989 Non-Employee Directors Stock
Option Plan (the "Directors Plan"), and no person shall become a member of the
Committee if, within the preceding one-year period, and, if and to the extent
required by Rule 16b-3, within the following one-year period, the person shall
have been, or will become, eligible to participate in the Plan or any other such
plan of the Company or any Parent or Subsidiary of the Company except for the
Directors Plan.
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. INTERPRETATION. 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).
III-9
<PAGE>
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<PAGE>
ANNEX IV
CIRCUIT CITY STORES, INC.
ANNUAL PERFORMANCE BASED BONUS PLAN
(AS PROPOSED TO BE AMENDED)
(PROPOSED AMENDMENTS ARE SET FORTH IN BOLD TYPE AND UNDERLINED;
PROPOSED DELETIONS ARE MARKED THROUGH)
1. PURPOSE. The purpose of the Circuit City Stores, 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. As used in the Plan, the following terms will have the
meaning indicated:
{(a) "ARTICLES" MEANS THE COMPANY'S ARTICLES OF INCORPORATION, AS AMENDED
AND RESTATED FROM TIME TO TIME.}
[(a)]{(b)} "Award" means an award made pursuant to the Plan.
[(b)]{(c)} "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)]{(d)} "Board" means the Board of Directors of the Company.
{(e) "CARMAX GROUP" HAS THE MEANING ASSIGNED TO THAT TERM UNDER SECTION
B(7)(A) OF ARTICLE V OF THE COMPANY'S ARTICLES.}
[(d)]{(f)} "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.
{(g) "CIRCUIT CITY GROUP" HAS THE MEANING ASSIGNED TO THAT TERM UNDER
SECTION B(7)(D) OF ARTICLE V OF THE COMPANY'S ARTICLES.}
{(h) "CIRCUIT CITY STOCK" AND "CARMAX STOCK" HAVE THE RESPECTIVE MEANINGS
ASSIGNED TO THOSE TERMS UNDER SECTION B(1) OF ARTICLE V OF THE COMPANY'S
ARTICLES.}
[(e)]{(i)} "Code" means the Internal Revenue Code of 1986, as amended.
[(f)]{(j)} "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)]{(k)} "Committee" means the committee appointed by the Board as
described under Section 5.
[(h)]{(l)} "Company" means Circuit City Stores, Inc., a Virginia
corporation.
[(i)]{(m)} "Covered Employee" means a covered employee within the meaning
of Code Section 162(m)(3).
[(j)]{(n)} "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)]{(o)} "Parent" means, with respect to any corporation, a parent of
that corporation within the meaning of Code Section 424(e).
[(l)]{(p)} "Participant" means an Executive Employee selected from time to
time by the Committee to participate in the Plan.
[(m)]{(q)} "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.
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<PAGE>
[(n)]{(r)} "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 FOR THE ENTIRE COMPANY, CALCULATED IN ACCORDANCE
WITH PROCEDURES ESTABLISHED BY THE COMMITTEE THAT ARE BASED ON GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES CONSISTENTLY APPLIED BY THE COMPANY;
(ii) THE COMBINED EARNINGS PER SHARE FOR ALL SERIES OF THE COMPANY'S
COMMON STOCK, CALCULATED IN ACCORDANCE WITH OBJECTIVE PROCEDURES
ESTABLISHED BY THE COMMITTEE WITH RESPECT TO THE APPLICABLE PLAN YEAR;
(iii) PRE-TAX EARNINGS FOR THE COMPANY'S CIRCUIT CITY GROUP, AS SHOWN
ON THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS, CALCULATED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES CONSISTENTLY APPLIED BY THE
COMPANY;
(iv) EARNINGS PER SHARE FOR THE COMPANY'S CIRCUIT CITY STOCK, AS SHOWN
ON THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS, CALCULATED IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES CONSISTENTLY APPLIED BY THE
COMPANY;
(v) PRE-TAX EARNINGS FOR THE COMPANY'S CARMAX GROUP, AS SHOWN ON THE
COMPANY'S ANNUAL REPORT TO SHAREHOLDERS, CALCULATED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES CONSISTENTLY APPLIED BY THE
COMPANY; AND
(vi) EARNINGS PER SHARE FOR THE COMPANY'S CARMAX STOCK, AS SHOWN ON
THE COMPANY'S ANNUAL REPORT TO SHAREHOLDERS, CALCULATED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES CONSISTENTLY APPLIED BY THE
COMPANY.}
[(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 Companys annual report to
shareholders, calculated in accordance with generally accepted accounting
principles consistently applied by the Company.]
[(o)]{(s)} "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)]{(t)} "Plan Year" means the fiscal year of the Company from March 1 to
the last day of February of each year.
[(q)]{(u)} "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)]{(v)} "Subsidiary" means, with respect to any corporation, a
subsidiary of that corporation within the meaning of Code Section 424(f).
[(s)]{(w)} "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
IV-2
<PAGE>
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.
(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 three 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.
IV-3
<PAGE>
(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 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. The Plan shall be effective as of March 1,
1994 and shall be submitted to the shareholders of the Company for approval. No
Award shall be payable to a Covered Employee until the Plan has been approved by
the Company's shareholders.
IV-4
<PAGE>
ANNEX V
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS.................................................................................. V-2
FINANCIAL STATEMENTS
Consolidated Statements of Earnings -- Years Ended February 29 or 28, 1996, 1995 and 1994........................... V-10
Consolidated Balance Sheets -- February 29 or 28, 1996 and 1995..................................................... V-11
Consolidated Statements of Cash Flows -- Years Ended February 29 or 28, 1996, 1995 and 1994......................... V-12
Consolidated Statements of Stockholders' Equity -- Years Ended February 29 or 28, 1996, 1995 and 1994............... V-13
Notes to Consolidated Financial Statements.......................................................................... V-14
Report of KPMG Peat Marwick LLP, Independent Auditors............................................................... V-24
INTERIM FINANCIAL STATEMENTS
Consolidated Statements of Earnings -- Three and Six Months Ended August 31, 1996 and 1995 (unaudited).............. V-25
Consolidated Balance Sheets -- August 31, 1996 (unaudited) and February 29, 1996.................................... V-26
Consolidated Statements of Cash Flows -- Six Months Ended August 31, 1996 and 1995 (unaudited)...................... V-27
Notes to Consolidated Financial Statements (unaudited).............................................................. V-28
</TABLE>
V-1
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our objective is to manage Circuit City's resources to create maximum
long-term value for the Company's shareholders. We achieve this objective by
adhering to the following policies:
1) We manage our existing business, primarily the current Superstore
markets, to produce the highest possible long-term returns.
2) We make new investments that we believe will increase our earnings and
produce returns above our cost of capital.
The results generated by current operations and by the Company's fiscal
1996 investments are reviewed below.
RESULTS OF OPERATIONS -- FISCAL YEARS 1996, 1995 AND 1994
SALES GROWTH
Total sales increased 26 percent in fiscal 1996, to $7.03 billion. In
fiscal 1995, total sales were $5.58 billion, a 35 percent increase from $4.13
billion in fiscal 1994.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
<TABLE>
<CAPTION>
CIRCUIT CITY
---------------------
ALL COMPARABLE INDUSTRY
FISCAL STORES STORES SALES*
- ------------------------------------------------------------------------------------------ ------ ---------- --------
<S> <C> <C> <C>
1996...................................................................................... 26% 5% 6%
1995...................................................................................... 35% 15% 11%
1994...................................................................................... 26% 8% 7%
1993...................................................................................... 17% 7% 7%
1992...................................................................................... 18% 1% 0%
</TABLE>
- ---------------
* THE INDUSTRY SALES RATES ARE DERIVED FROM ELECTRONIC INDUSTRIES ASSOCIATION,
ASSOCIATION OF HOME APPLIANCE MANUFACTURERS, RECORDING INDUSTRY ASSOCIATION OF
AMERICA AND COMPANY ESTIMATES OF AUDIO, VIDEO, HOME OFFICE,
TELECOMMUNICATIONS, APPLIANCE AND MUSIC SOFTWARE SALES. MUSIC SOFTWARE IS NOT
INCLUDED IN INDUSTRY SALES PRIOR TO FISCAL 1995. IN THOSE YEARS, CIRCUIT CITY
WAS NOT A SIGNIFICANT PARTICIPANT IN THIS CATEGORY.
CIRCUIT CITY OPERATIONS. Circuit City's total sales growth primarily
reflects continued expansion of the Superstore base and strong comparable store
sales growth from Circuit City operations during most of the last three years.
In fiscal 1996, the Company opened a net of 66 Superstores compared with 59
Superstores in the previous fiscal year. Twelve of the fiscal 1996 stores opened
in the last month of the year. The Company entered the following major
metropolitan markets: Buffalo, N.Y.; Denver, Colo.; Hartford, Conn.; Milwaukee,
Wisc.; Rochester, N.Y.; Salt Lake City, Utah; and Springfield, Mass. The Company
also opened stores in smaller markets, added stores to existing markets and
replaced or expanded 15 stores.
The Company operates four Circuit City Superstore formats with square
footage and merchandise assortments tailored to population and volume
expectations for specific trade areas. With these formats, the Company can
penetrate virtually every market in the U.S. The "D" format was developed in
fiscal 1995 to serve the most populous trade areas. Selling space in the "D"
format averages about 23,000 square feet with total square footage averaging
42,242. The "D" stores offer the largest merchandise assortment of all the
formats. The "C" format constitutes the largest percent of the store base.
Selling square footage in this format has been increased during the last several
years, and new "C" stores typically have about 17,000 square feet of selling
space. Total square footage for all "C" stores averages 33,828. The "B" format
often is located in smaller markets or in trade areas that are on the fringes of
larger metropolitan markets. Selling space in these stores averages
approximately 11,000 square feet with an average total square footage of 24,685.
The "B" stores offer a broad merchandise assortment that maximizes return on
investment in these lower volume areas. The "A" format serves the least
populated trade areas. Selling space averages approximately 9,000 square feet,
and total square footage averages 18,026. The "A" stores feature a layout,
staffing levels and merchandise assortment that creates high productivity in the
smallest markets.
The Company also operates 36 mall-based Circuit City Express stores. These
stores are located in regional malls, are approximately 2,000 to 3,000 square
feet in size and sell small, gift-oriented items. During fiscal 1996, the
Company opened five Circuit City Express stores and closed four stores located
in underperforming malls.
V-2
<PAGE>
STORE MIX
<TABLE>
<CAPTION>
RETAIL UNITS AT YEAR END
----------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1996 1995 1994 1993 1992
- ------------------------------------------------------------------ ---- ---- ---- ---- ----
SUPERSTORE
"D" Superstore.................................................. 61 12 -- -- --
"C" Superstore.................................................. 259 257 219 188 170
"B" Superstore.................................................. 46 37 30 24 11
"A" Superstore.................................................. 12 6 4 2 2
Electronics-Only.................................................. 5 5 7 7 11
Circuit City Express.............................................. 36 35 34 39 34
---- ---- ---- ---- ----
Total........................................................ 419 352 294 260 228
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Over the past three years, industry growth in personal computers has driven
strong comparable store sales increases for the Company. During the first half
of fiscal 1996, rapid PC sales growth and relatively strong demand for consumer
electronics and major appliances contributed to a 10 percent comparable store
sales increase. Challenging prior year sales comparisons and softer industry
sales in all categories led to a more modest increase of 1 percent for the
second half and 5 percent for the full year. Based on market research and sales
performance, the Company believes that it continues to maintain substantial
shares in existing markets and to build significant shares in new markets.
For the Company's core retail business, gross dollar sales from all
extended warranty programs were 5.9 percent of sales in fiscal year 1996,
compared with 5.8 percent in both fiscal 1995 and 1994. Total extended warranty
revenue, which is reported in total sales, was 5.1 percent of sales in fiscal
year 1996, 5.4 percent in fiscal year 1995 and 4.8 percent in fiscal year 1994.
The gross profit margins on products sold with extended warranties are higher
than the gross profit margins on products sold without extended warranties. Late
in fiscal 1994, the Company began selling two new extended warranty programs on
behalf of unrelated third parties that issue these plans for merchandise sold by
the Company and other retailers. One of these programs is sold in most major
markets and features in-home service for personal computer products. The second
program covers electronics and major appliances and at year-end was offered by
approximately two-thirds of the Superstores. The remaining stores sell a Circuit
City extended warranty. Under the third-party programs, Circuit City acts as
seller for the unrelated third parties and has no contractual liability to the
customer under the extended warranty plans. Commission revenue from the
third-party extended warranty plans is recognized immediately while revenue from
Circuit City extended warranties is deferred and amortized on a straight-line
basis over the life of the contracts. In fiscal 1996, the increase in
third-party revenue was more than offset by a decrease in revenue recognized
from Circuit City contracts sold in prior periods. The increase in third-party
warranty sales contributed to the growth in total extended warranty revenue from
fiscal 1994 to fiscal 1995. Third-party extended warranty revenue was 3.0
percent of total sales in fiscal 1996, 2.3 percent in fiscal 1995 and 0.7
percent in fiscal 1994. The Company expects third-party extended warranty
revenue to continue increasing in fiscal 1997.
SUPERSTORE SALES PER TOTAL SQUARE FOOT
<TABLE>
<CAPTION>
FISCAL
- ---------------------------------------------------------------------------------------------------
<S> <C>
1996............................................................................................... $ 577
1995............................................................................................... $ 584
1994............................................................................................... $ 523
1993............................................................................................... $ 487
1992............................................................................................... $ 460
</TABLE>
SUPERSTORE SALES PER TOTAL SQUARE FOOT. Over the last five years, the
Company has significantly increased the percentage of store square footage
devoted to selling space. Expanded merchandise assortments and additional
product categories such as personal computers and music software contribute to
higher sales per total square foot in some stores. In fiscal 1995, the total
square footage of new stores began to increase. The larger stores generate high
sales volumes in specific trade areas but have lower sales per total square foot
than smaller Superstores. As a result, the Company's Superstore sales per total
square foot declined in fiscal 1996.
V-3
<PAGE>
SALES BY MERCHANDISE CATEGORIES*
<TABLE>
<CAPTION>
FISCAL 1996 1995 1994 1993 1992
- --------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
TV....................................................... 17 % 19 % 20 % 23 % 23 %
VCR/Camcorders........................................... 13 % 14 % 17 % 19 % 20 %
Audio.................................................... 19 % 22 % 23 % 23 % 26 %
Home Office.............................................. 26 % 20 % 12 % 7 % 5 %
Appliances............................................... 14 % 15 % 18 % 19 % 19 %
Other.................................................... 11 % 10 % 10 % 9 % 7 %
---- ---- ---- ---- ----
Total............................................... 100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
- ---------------
* IN FISCAL 1996, THE COMPANY MOVED CELLULAR PHONES FROM THE "AUDIO" CATEGORY TO
THE "OTHER" CATEGORY AND MOVED CERTAIN AUDIO PRODUCTS FROM THE "OTHER"
CATEGORY TO THE "AUDIO" CATEGORY. SALES OF THESE PRODUCTS HAVE BEEN
RECLASSIFIED FOR PRIOR YEARS.
SALES BY MERCHANDISE CATEGORIES. Home office products, primarily personal
computers, have increased dramatically as a percentage of the Company's sales
during the past five years. This growth reflects a rapid increase in household
penetration of this product and the strength of Circuit City's consumer offer in
the category. Within the consumer electronics categories, the greatest sales
growth has occurred among the fully featured products such as large-screen
televisions and SurroundSound audio systems. A lack of new product features and
declining retail prices for small-screen televisions and video cassette
recorders have limited sales growth in the video categories. A proliferation of
retail outlets and increased household penetration have reduced cellular phone
sales, which are included in "Other."
IMPACT OF INFLATION. Inflation has not been a significant contributor to
industry growth or to Circuit City's sales growth during the last five years.
The Company expects no significant change in this trend. Because the Company
purchases substantially all products, including consumer electronics, in U.S.
dollars, prices are not directly impacted by the value of the dollar in relation
to other foreign currencies, including the Japanese yen.
CARMAX. During the second half of fiscal 1994, the Company began testing
CarMax: The Auto Superstore, a retail concept that sells used automobiles. The
Company expanded the test to a second location in fiscal 1995 and added two more
locations in fiscal 1996. In January 1996, the Company announced plans to begin
a national rollout of CarMax. CarMax sales totaled $304.5 million in fiscal
1996. CarMax is not included in the reported comparable store sales growth.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin declined to 23.3 percent of sales in fiscal 1996
compared with 24.8 percent in fiscal 1995 and 26.8 percent in fiscal 1994. The
gross profit margin trend reflects growth in personal computer sales, which
produce gross profit margins lower than the Company's average; increased
competition; and a highly promotional climate. The trend also reflects the
addition of CarMax, which generates lower gross margins than the Circuit City
operations, to the sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's lower gross profit margin has been partly offset by
improvements in selling, general and administrative expenses as a percent of
sales. The expense ratio was 18.8 percent of sales in fiscal 1996, 19.8 percent
in fiscal 1995 and 21.6 percent in fiscal 1994. The improvement in the expense
ratio primarily reflects total and comparable store sales growth achieved
throughout the three-year period, an ongoing focus on maximizing store
productivity and productivity of corporate overhead expenditures, a net
contribution from the credit card bank subsidiary and a lower expense structure
for CarMax.
Operating profits generated by the Company's credit card bank subsidiary
are recorded as a reduction to SG&A expenses. Throughout the three-year period,
the subsidiary has benefited from a generally low interest rate environment,
which lowers the bank's cost of funds.
INTEREST EXPENSE
Interest expense increased to 0.4 percent of sales in fiscal 1996, from 0.2
percent in fiscal 1995 and 0.1 percent in fiscal 1994. The increase reflects
higher interest rates, the net addition of $369 million of long-term debt since
fiscal 1994 and higher short-term borrowings resulting from the Company's
growth.
INCOME TAXES
The Company's effective income tax rate was 37.5 percent in both fiscal
1996 and fiscal 1995 and 36.7 percent in fiscal 1994. An increase in the federal
statutory income tax rate in fiscal 1994 required a revaluation of the Company's
deferred tax
V-4
<PAGE>
asset. That revaluation had a favorable impact on the fiscal 1994 provision for
income taxes and resulted in the lower effective tax rate for that fiscal year.
The higher federal statutory income tax rate increased the Company's effective
tax rate for the latter half of fiscal 1994 and throughout fiscal years 1995 and
1996.
NET EARNINGS
Net earnings rose 7 percent to $179.4 million in fiscal 1996. In fiscal
1995, net earnings were $167.9 million, a 27 percent increase from $132.4
million in fiscal 1994. Net earnings per share rose 6 percent in fiscal 1996, to
$1.82, and 26 percent in fiscal 1995, to $1.72 from $1.36 in fiscal 1994. The
Company's investment in the CarMax concept reduced fiscal 1996 net earnings per
share by 7 cents.
RETURN ON SALES
Return on sales was 2.6 percent in fiscal 1996 compared with 3.0 percent in
fiscal 1995 and 3.2 percent in fiscal 1994.
OPERATIONS OUTLOOK
Looking forward, management believes that continued investment in
Superstore expansion will maximize long-term shareholder value. Management
estimates that in fiscal 1997 the remaining markets suitable for Superstore
expansion will represent $37 billion of the consumer electronics, home office,
major appliance and music software industry's total retail sales potential of
$95 billion. By the year 2000, Circuit City expects to expand the Superstore
base into most of these markets. In fiscal 1997, the Company expects to open an
estimated 60 to 65 Superstores, including approximately 20 "D" stores, 32 "C"
stores, 10 "B" stores and three "A" stores. Approximately 35 of the new
Superstores will open in new markets. The Company also plans to replace
approximately 15 to 20 "B" and "C" stores with larger format stores, to open
additional Circuit City Express stores and to open at least three more CarMax
locations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The standard is effective for fiscal years beginning after December 15, 1995.
The Company does not expect the standard to have a material impact on the
Company's financial position or results of operations. This SFAS will be
implemented for the fiscal year ending February 28, 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company does not intend to adopt the optional new accounting
method of the standard; however, the additional disclosures required by this
SFAS will be made for the fiscal year ending February 28, 1997. The disclosure
requirements of the standard are effective for fiscal years beginning after
December 15, 1995.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. In fiscal 1996, net cash used in operating activities was $55.3
million compared with $47.0 million provided by operating activities in fiscal
1995 and $108.3 million provided by operating activities in fiscal 1994. The
fiscal 1996 decrease principally reflects the limited earnings growth and lower
increases in the provision for deferred income taxes and in accounts payable.
These changes were partly offset by less rapid growth in merchandise inventory,
reflecting lower sales growth expectations at the end of the fiscal year, and in
accounts receivable, which reflects securitization transactions during the year.
The Company funded capital expenditures of $518.2 million in fiscal 1996
primarily with $251.5 million in proceeds from sales of property and equipment
and proceeds from a five-year, $175 million unsecured bank term loan. The
proceeds from sales of property and equipment include $183.9 million from
sale-leaseback transactions, $49.0 million related to landlord reimbursements
for improvements on leased land and $18.6 million from other sources. Capital
expenditures in fiscal 1996 principally reflect Superstores opened during the
year and a portion of the Superstores opening in fiscal 1997. The sale-leaseback
transactions completed in fiscal 1996 are largely related to real estate
purchased in fiscal years 1996 and 1995. The Company expects to complete
additional sale-leaseback transactions in fiscal 1997. Capital expenditures of
$375.4 million in fiscal 1995 and $252.3 million in fiscal 1994 largely were
incurred in connection with the Superstore expansion program. The expenditures
were funded primarily with net cash provided by operating activities,
sale-leaseback arrangements, and landlord reimbursements. In fiscal 1995, the
Company also utilized proceeds from a seven-year, $100 million unsecured bank
term loan.
The Company's credit card bank subsidiary primarily funds its credit card
programs through securitization transactions, which allow the subsidiary to sell
the receivables while retaining a small interest in the receivables. The
Company's credit
V-5
<PAGE>
card bank subsidiary has a master trust securitization facility for its
private-label credit card that allows the transfer of up to $1.06 billion in
receivables through both private placement and the public market. A second
securitization program allowed, at February 29, 1996, for the transfer of up to
$850 million in receivables related to the subsidiary's bankcard programs. In
fiscal 1996, automobile receivables generated by the Company's installment
lending division were financed with proceeds of $87 million from a
securitization transaction. The Company expects that all securitization programs
can be expanded to accommodate future receivables growth.
As explained in Note 10 to the Consolidated Financial Statements, the
Company has entered into interest rate swap agreements related to the public
issuance of securities by the master trust and the securitization of auto loan
receivables. The interest rate swaps enable the Company to better match funding
costs to the underlying finance charges of the receivables.
CAPITAL STRUCTURE. Total assets at February 29, 1996, were $2.53 billion,
up $522.0 million, or 26 percent since February 28, 1995. The rise in assets
includes increases of $287.4 million in inventory, $181.3 million in net
property and equipment and $59.8 million in net receivables.
The Company has funded expansion with internally generated funds,
sale-leaseback transactions, operating leases and long-term debt. The Company
has funded consumer receivables through securitization transactions. In fiscal
1996, the Company entered into a five-year, $175 million unsecured bank term
loan agreement. As explained in Note 10 to the Consolidated Financial
Statements, the Company has entered into interest rate swap agreements that
effectively convert the loan facility's variable-rate obligation to a fixed-rate
obligation. At February 28, 1995, the Company classified $53 million of
short-term debt as long-term in anticipation of the $175 million loan agreement.
Average short-term debt rose in fiscal 1996 as the Company utilized seasonal
borrowing lines primarily to finance higher inventory needs resulting from more
rapid Superstore expansion and the growth of the CarMax concept. At February 29,
1996, the Company classified $100 million of short-term debt as long-term. The
Company expects to refinance this debt in fiscal 1997 by entering into a
multi-year term loan agreement with a group of banks.
During the period from fiscal 1992 to 1996, stockholders' equity grew
substantially. From fiscal 1995 to 1996, stockholders' equity increased 21
percent to $1.06 billion. Capitalization for the past five years is illustrated
in the "Capitalization" table. Slower earnings growth produced a return on
equity of 18.5 percent in fiscal 1996 compared with 21.1 percent in fiscal 1995.
The fiscal 1996 return was below the Company's long-term objective of 20
percent.
The Company expects to maintain its existing long-term capitalization
strategy in fiscal 1997. Management anticipates that capital expenditures of
approximately $575 million will be funded through a combination of internally
generated funds, sale-leaseback transactions and operating leases and that
securitization transactions will finance the increase in credit card and CarMax
receivables. At the end of fiscal 1996, the Company maintained a multi-year,
$100 million unsecured revolving credit agreement and $255 million in seasonal
lines that are renewed annually with various banks.
CAPITALIZATION
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
FISCAL $ % $ % $ % $ % $ %
- ---------------------------------------- ------- --- ------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
Long-term debt, excluding current
installments.......................... 399.2 23 178.6 14 29.6 3 82.4 9 85.4 12
Other long-term liabilities............. 231.8 14 241.9 19 268.4 27 232.1 26 187.1 26
Total stockholders' equity.............. 1,063.9 63 877.4 67 710.4 70 575.5 65 448.0 62
------- --- ------- --- ------- --- ------- --- ------- ---
Total Capitalization.................... 1,694.9 100 1,297.9 100 1,008.4 100 890.0 100 720.5 100
------- --- ------- --- ------- --- ------- --- ------- ---
------- --- ------- --- ------- --- ------- --- ------- ---
</TABLE>
V-6
<PAGE>
RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF FISCAL 1997 VERSUS FIRST SIX MONTHS
OF FISCAL 1996
NET SALES AND OPERATING REVENUES AND GENERAL COMMENTS
Sales for the second quarter of fiscal 1997 were $1.77 billion, an increase
of 10 percent from $1.60 billion in the same period last year. Sales for the
first half of fiscal 1997 were $3.38 billion, an increase of 13 percent from
sales of $2.99 billion in the same period last year. The total sales increase
reflects the continued growth of the Company's Circuit City and CarMax concepts,
partly offset by a Circuit City comparable store sales decrease.
Circuit City comparable store sales increases (decreases) for the second
quarter and first six months of fiscal years 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
FY'97 2ND QUARTER SIX MONTHS
- -------------------------- ---------------- ----------------
JUN JUL AUG FY'97 FY'96 FY'97 FY'96
- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(3%) (11%) (6%) (7%) 10% (6%) 10%
</TABLE>
The second quarter comparable store sales results were below management's
expectations and reflected the slowing in industry sales that began in last
year's second half, the resulting intensity in the competitive climate and
strong prior year comparisons. Management expects that lower prior year
comparable store sales results will produce improved sales comparisons during
the second half of fiscal 1997, but slow industry sales and competitive pricing
are likely to constrain growth for all retailers in the segment.
During the quarter, the Company opened seven new Circuit City Superstores
and replaced three stores with larger locations. The Company opened stores in
Denver and Colorado Springs, Colo.; Atlanta, Ga.; Los Angeles, Calif.; Salt Lake
City, Utah; Seattle, Wash.; and Greenville, N.C. By the end of the first half,
the Company had opened 15 Superstores and replaced or expanded eight. By fiscal
year-end, the Company plans to have opened 65 Superstores and replaced 15 to 20
existing stores.
The table below details Circuit City retail units:
<TABLE>
<CAPTION>
STORES OPEN AT
END OF QUARTER
------------------------------ ESTIMATE
AUG. 31, 1996 AUG. 31, 1995 FEB. 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
SUPERSTORE
"D" Superstore................................................... 76 29 93
"C" Superstore................................................... 258 260 279
"B" Superstore................................................... 47 39 54
"A" Superstore................................................... 12 7 17
Electronics-Only................................................... 5 5 5
Circuit City Express............................................... 41 32 47
--- --- ---
Total............................................................ 439 372 495
--- --- ---
--- --- ---
<CAPTION>
FEB. 29, 1996
-------------
<S> <C>
SUPERSTORE
"D" Superstore................................................... 61
"C" Superstore................................................... 259
"B" Superstore................................................... 46
"A" Superstore................................................... 12
Electronics-Only................................................... 5
Circuit City Express............................................... 36
---
Total............................................................ 419
---
---
</TABLE>
In mid-June, the Company announced a five-year expansion plan for CarMax,
the Company's automotive retail concept. The Company currently operates five
CarMax stores. By calendar year 2001, the Company expects to be operating 80 to
90 CarMax stores. In the current fiscal year, the Company expects to enter the
Orlando and Tampa, Fla., markets. In fiscal 1998, the Company plans to open
another eight to 10 CarMax locations and, thereafter, to accelerate the opening
program by adding 15 to 20 stores per year.
For the Company's Circuit City business, gross dollar sales from all
extended warranty programs rose to 6.2 percent of sales in the second quarter of
fiscal year 1997 from 6.0 percent in the same period last year. Third-party
warranty revenue rose to 3.7 percent of sales in this year's second quarter from
3.0 percent in the same period last year. The total extended warranty revenue
that is reported in total sales was 5.5 percent of sales in this year's second
quarter versus 5.4 percent in the second quarter of last year.
V-7
<PAGE>
Total sales by merchandise categories are listed below:
<TABLE>
<CAPTION>
2ND QUARTER SIX MONTHS
-------------------------- -----------
FISCAL 1997 FISCAL 1996 FISCAL 1997
----------- ----------- -----------
<S> <C> <C> <C>
TV.......................................................................... 17% 16% 17%
VCR/Camcorders.............................................................. 14 13 14
Audio*...................................................................... 17 19 18
Home Office................................................................. 23 24 23
Appliances.................................................................. 19 18 18
Other*...................................................................... 10 10 10
--- --- ---
Total..................................................................... 100% 100% 100%
--- --- ---
--- --- ---
<CAPTION>
FISCAL 1996
-----------
<S> <C>
TV.......................................................................... 16%
VCR/Camcorders.............................................................. 14
Audio*...................................................................... 19
Home Office................................................................. 24
Appliances.................................................................. 17
Other*...................................................................... 10
---
Total..................................................................... 100%
---
---
</TABLE>
- ---------------
* IN THE FOURTH QUARTER OF FISCAL 1996, THE COMPANY MOVED CELLULAR PHONES FROM
THE "AUDIO" CATEGORY TO THE "OTHER" CATEGORY AND MOVED CERTAIN AUDIO PRODUCTS
FROM THE "OTHER" CATEGORY TO THE "AUDIO" CATEGORY. SALES OF THESE PRODUCTS
HAVE BEEN RECLASSIFIED FOR THE PRIOR YEAR QUARTERS.
The Company's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, the Company has realized more of
its net sales and net earnings in the final fiscal quarter, which includes the
Christmas season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin decreased to 22.4 percent of sales in the second
quarter of fiscal 1997 from 23.0 percent in the same period last year. The gross
margins for the six months ended August 31, 1996 and 1995, were also 22.4
percent and 23.0 percent, respectively.
Partly in reaction to weak industry sales, the promotional climate has
remained intense. The lower margin reflects this promotional intensity and
increased CarMax sales. Management expects that these factors will continue to
lower margins on a year-over-year basis.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expense ratio increased
from 18.6 percent of sales in the second quarter of last year to 19.3 percent
for the same period this year. For the six-month period ended August 31, 1996,
the expense ratio was 19.8 percent versus 19.2 percent in the same period last
year.
The increase primarily reflects the impact of lower comparable store sales,
partly offset by the increased contribution from the credit card bank subsidiary
and the lower cost structure for CarMax.
INCOME TAXES
The effective income tax rate was 38.0 percent in the second quarter and
first six months of fiscal 1997 versus 37.5 percent in the same periods last
year. Management expects the effective rate to remain at 38.0 percent for the
remainder of fiscal 1997.
NET EARNINGS
Net earnings for the quarter ended August 31, 1996, decreased 23 percent to
$31.6 million from $41.2 million in the same period last year. Net earnings per
share declined 24 percent to 32 cents from 42 cents.
Net earnings for the six months ended August 31, 1996, were $48.4 million,
a decrease of 27 percent from $65.9 million in the same period last year. Net
earnings per share decreased 27 percent to 49 cents from 67 cents.
Because first half earnings were below expectations and the fourth fiscal
quarter is the largest contributor to the year's results, management is cautious
in its current outlook for the second half. However, management does anticipate
that earnings for the full fiscal year will be below initial expectations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The
V-8
<PAGE>
standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and shall be
applied prospectively. The Company does not expect the standards to have a
material impact on financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Total assets at August 31, 1996, were $2,730.7 million, up $204.7 million
or 8 percent since February 29, 1996. The largest contributor to the asset
increase was a $97.4 million increase in net accounts and notes receivable,
primarily due to an increase in credit card accounts generated by the Company's
credit card bank subsidiary. Inventory increased by $65.5 million to support new
store openings. Property and equipment has increased $54.4 million, largely
because of planned and completed store openings.
Accounts payable has increased $110.5 million and short-term debt has
increased $83.4 million since the end of fiscal 1996 to support new store
expansion and the purchase of inventory.
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent. The
proceeds will be used for general corporate purposes.
The Company's credit card bank subsidiary has a master trust securitization
facility for its private-label credit card that allows the transfer of up to
$1.06 billion in receivables through private placement and the public market.
The master trust vehicle permits further expansion of the securitization program
to meet future needs. In addition, the Company's credit card bank subsidiary has
an asset securitization program that allows the transfer of up to $1.20 billion
in receivables related to its other bank card programs. The Company also has an
asset securitization program that allows the transfer of up to $150 million in
auto loan receivables. The Company anticipates that it will be able to expand
its securitization programs to meet future needs.
The Company expects to continue its existing long-term capitalization
strategy during fiscal 1997. Management anticipates that capital expenditures
will be funded through a combination of internally generated funds,
sale-leaseback transactions, operating leases and proceeds of the recent
long-term debt agreement and that securitization transactions will be used to
finance the growth in credit card and auto loan receivables. On August 31, 1996,
the Company entered into a multi-year, $150 million unsecured revolving credit
agreement with a group of banks, replacing a similar $100 million facility, and
held $410 million in seasonal lines that are renewed annually with various
banks.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains forward-looking statements
regarding the Company. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed in the Company's
1996 Annual Report on Form 10-K. See "Cautionary Statement Regarding
Forward-Looking Statements" in the Proxy Statement.
V-9
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------------------------------------------
1996 % 1995 % 1994 %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating revenues.......................... $7,029,123 100.0 $5,582,947 100.0 $4,130,415 100.0
Cost of sales, buying and warehousing..................... 5,394,293 76.7 4,197,947 75.2 3,024,759 73.2
---------- ----- ---------- ----- ---------- -----
Gross profit.............................................. 1,634,830 23.3 1,385,000 24.8 1,105,656 26.8
---------- ----- ---------- ----- ---------- -----
Selling, general and administrative expenses (Note 8)..... 1,322,430 18.8 1,106,370 19.8 891,865 21.6
Interest expense (Note 3)................................. 25,400 0.4 10,030 0.2 4,791 0.1
---------- ----- ---------- ----- ---------- -----
Total expenses............................................ 1,347,830 19.2 1,116,400 20.0 896,656 21.7
---------- ----- ---------- ----- ---------- -----
Earnings before income taxes.............................. 287,000 4.1 268,600 4.8 209,000 5.1
Provision for income taxes (Note 4)....................... 107,625 1.5 100,725 1.8 76,600 1.9
---------- ----- ---------- ----- ---------- -----
Net earnings.............................................. $ 179,375 2.6 $ 167,875 3.0 $ 132,400 3.2
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Weighted average common shares and common share
equivalents............................................. 98,546 97,369 97,391
---------- ---------- ----------
---------- ---------- ----------
Net earnings per share.................................... $ 1.82 $ 1.72 $ 1.36
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
V-10
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT FEBRUARY 29 OR 28
------------------------
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 43,704 $ 46,962
Net accounts and notes receivable (Note 9)...................................................... 324,395 264,565
Merchandise inventory........................................................................... 1,323,183 1,035,776
Deferred income taxes (Note 4).................................................................. 26,996 25,696
Prepaid expenses and other current assets....................................................... 17,399 14,162
---------- ----------
TOTAL CURRENT ASSETS......................................................................... 1,735,677 1,387,161
Property and equipment, net (Notes 2 and 3)..................................................... 774,265 592,956
Deferred income taxes (Note 4).................................................................. -- 5,947
Other assets.................................................................................... 16,080 17,991
---------- ----------
TOTAL ASSETS................................................................................. $2,526,022 $2,004,055
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt (Notes 3 and 7).......................................... $ 1,436 $ 2,378
Accounts payable................................................................................ 604,488 576,578
Short-term debt................................................................................. 92,087 --
Accrued expenses and other current liabilities.................................................. 123,789 113,631
Accrued income taxes............................................................................ 9,375 13,533
---------- ----------
TOTAL CURRENT LIABILITIES.................................................................... 831,175 706,120
Long-term debt, excluding current installments (Notes 3 and 7).................................. 399,161 178,605
Deferred revenue and other liabilities.......................................................... 214,001 241,866
Deferred income taxes (Note 4).................................................................. 17,764 --
---------- ----------
TOTAL LIABILITIES............................................................................ 1,462,101 1,126,591
---------- ----------
STOCKHOLDERS' EQUITY (Note 5):
Common stock, $0.50 par value; 150,000,000 shares authorized;
97,380,000 shares issued and outstanding (96,476,000 in 1995)................................ 48,690 48,238
Capital in excess of par value.................................................................. 90,432 72,639
Retained earnings............................................................................... 924,799 756,587
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................................................................... 1,063,921 877,464
---------- ----------
Commitments and contingent liabilities (Notes 6, 7, 9, 10 and 11)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................................ $2,526,022 $2,004,055
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
V-11
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings........................................................................... $179,375 $167,875 $132,400
Adjustments to reconcile net earnings to net cash (used in) provided by operating
activities:
Depreciation and amortization....................................................... 79,812 66,866 55,012
Loss on sales of property and equipment............................................. 5,600 2,199 1,910
Provision for deferred income taxes................................................. 22,411 73,745 (17,800)
(Decrease) increase in deferred revenue and other liabilities....................... (27,865) (26,494) 36,306
Increase in net accounts and notes receivable....................................... (59,830) (75,575) (68,542)
Increase in merchandise inventory, prepaid expenses and other current assets........ (290,644) (317,114) (203,783)
Decrease (increase) in other assets................................................. 1,911 (3,819) (522)
Increase in accounts payable, accrued expenses and other current liabilities, and
accrued income taxes............................................................... 33,910 159,297 173,300
-------- -------- --------
Net cash (used in) provided by operating activities.................................... (55,320) 46,980 108,281
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................... (518,175) (375,406) (252,256)
Proceeds from sales of property and equipment.......................................... 251,454 151,481 128,029
-------- -------- --------
Net cash used in investing activities.................................................. (266,721) (223,925) (124,227)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt.............................................. 92,087 -- --
Proceeds from issuance of long-term debt............................................... 222,000 153,000 --
Principal payments on long-term debt................................................... (2,386) (3,484) (52,748)
Proceeds from issuance of common stock, net............................................ 18,245 8,352 10,150
Dividends paid......................................................................... (11,163) (9,155) (7,674)
-------- -------- --------
Net cash provided by (used in) financing activities.................................... 318,783 148,713 (50,272)
-------- -------- --------
Decrease in cash and cash equivalents.................................................... (3,258) (28,232) (66,218)
Cash and cash equivalents at beginning of year........................................... 46,962 75,194 141,412
-------- -------- --------
Cash and cash equivalents at end of year................................................. $ 43,704 $ 46,962 $ 75,194
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................................... $ 22,905 $ 8,150 $ 5,297
Income taxes........................................................................... $ 88,477 $ 98,894 $ 81,773
</TABLE>
See accompanying notes to consolidated financial statements.
V-12
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON CAPITAL IN
SHARES COMMON EXCESS OF RETAINED
OUTSTANDING STOCK PAR VALUE EARNINGS TOTAL
----------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
BALANCE AT MARCH 1, 1993....................................... 95,670 $47,835 $ 54,540 $473,141 $ 575,516
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 132,400 132,400
Exercise of common stock options (Note 5).................... 316 158 2,994 -- 3,152
Shares issued under Employee Stock Purchase Plan (Note 5).... 76 38 1,895 -- 1,933
Shares issued under the 1988 Stock Incentive Plan (Note 5)... 146 73 3,589 -- 3,662
Tax benefit from stock issued................................ -- -- 3,367 -- 3,367
Shares cancelled upon reacquisition by Company............... (128) (64) (2,014) -- (2,078)
Unearned compensation-restricted stock (Note 5).............. -- -- 114 -- 114
Cash dividends-common stock ($0.08 per share)................ -- -- -- (7,674) (7,674)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 28, 1994................................... 96,080 48,040 64,485 597,867 710,392
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 167,875 167,875
Exercise of common stock options (Note 5).................... 260 130 2,519 -- 2,649
Shares issued under Employee Stock Purchase Plan (Note 5).... 87 43 1,868 -- 1,911
Shares issued under the 1994 Stock Incentive Plan (Note 5)... 211 106 3,740 -- 3,846
Tax benefit from stock issued................................ -- -- 3,272 -- 3,272
Shares cancelled upon reacquisition by Company............... (162) (81) (3,089) -- (3,170)
Unearned compensation-restricted stock (Note 5).............. -- -- (156) -- (156)
Cash dividends-common stock ($0.10 per share)................ -- -- -- (9,155) (9,155)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 28, 1995................................... 96,476 48,238 72,639 756,587 877,464
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 179,375 179,375
Exercise of common stock options (Note 5).................... 645 322 7,831 -- 8,153
Shares issued under Employee Stock Purchase Plan (Note 5).... 75 38 2,174 -- 2,212
Shares issued under the 1994 Stock Incentive Plan (Note 5)... 259 129 5,745 -- 5,874
Tax benefit from stock issued................................ -- -- 4,746 -- 4,746
Shares cancelled upon reacquisition by Company............... (75) (37) (1,631) -- (1,668)
Unearned compensation-restricted stock (Note 5).............. -- -- (1,072) -- (1,072)
Cash dividends-common stock ($0.12 per share)................ -- -- -- (11,163) (11,163)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 29, 1996................................... 97,380 $48,690 $ 90,432 $924,799 $1,063,921
----------- ------- ---------- -------- ----------
----------- ------- ---------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
V-13
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Circuit City
Stores, Inc. and its subsidiaries (the Company), all of which are wholly owned.
All significant intercompany balances and transactions have been eliminated in
consolidation.
(B) CASH AND CASH EQUIVALENTS
Cash equivalents of $10,113,000 and $18,719,000 at February 29, 1996, and
February 28, 1995, respectively, consist of highly liquid debt securities with
original maturities of three months or less.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, excluding
interest rate swap agreements ("swaps"), approximates fair value due to variable
interest rates on long-term debt and the short-term maturities of the assets and
other liabilities. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. The Company mitigates credit risk by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Company does not anticipate loss for
nonperformance. The Company broadly diversifies all financial instruments along
industry, product and geographic areas. As discussed in Note 10, swaps are not
held for trading purposes and, therefore, are not carried at fair value.
(D) MERCHANDISE INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined by
the average cost method.
(E) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the assets' estimated useful lives, which range from
three to 25 years.
Property held under capital leases is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(F) PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are deferred and
amortized ratably over the period from the date of the store opening to the end
of the fiscal year.
(G) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for income tax purposes, measured by applying
currently enacted tax laws. The Company recognizes deferred tax assets if it is
more likely than not that a benefit will be realized.
(H) DEFERRED REVENUE
The Company sells its own extended warranty contracts and extended warranty
contracts on behalf of unrelated third parties. The contracts extend beyond the
normal manufacturer's warranty period, usually with terms of coverage (including
the manufacturer's warranty period) between 12 and 60 months.
All revenue from the sale of the Company's own extended warranty contracts
is deferred and amortized on a straight-line basis over the life of the
contracts. Incremental direct contract costs related to the sale of contracts
are deferred and
V-14
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
charged to expense in proportion to the revenue recognized. All other costs are
charged to expense as incurred. Commission revenue for the unrelated third-party
extended warranty plans is recognized at the time of sale.
(I) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating profits generated by the Company's credit card bank subsidiary
are recorded as a reduction to selling, general and administrative expenses.
(J) ADVERTISING EXPENSES
All advertising costs are expensed as incurred.
(K) EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding during the year.
(L) RISKS AND UNCERTAINTIES
The Company is the nation's largest retailer of brand-name consumer
electronics and major appliances and a leading retailer of personal computers
and music software. The diversity of the Company's products, customers,
suppliers and geographic operations significantly reduces the risk that a severe
impact will occur in the near term as a result of changes in its customer base,
competition, sources of supply or markets. It is unlikely that any one event
would have a severe impact on the Company's operating results.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(M) RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
classifications adopted in fiscal 1996.
2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Land and buildings (20 to 25 years)....................................... $ 89,089 $ 83,109
Construction in progress.................................................. 197,980 122,446
Furniture, fixtures and equipment (3 to 8 years).......................... 389,845 344,923
Leasehold improvements (10 to 15 years)................................... 353,157 286,610
Capital leases, primarily buildings (20 years)............................ 13,140 13,679
---------- ----------
1,043,211 850,767
Less accumulated depreciation and amortization............................ 268,946 257,811
---------- ----------
Property and equipment, net............................................... $ 774,265 $ 592,956
---------- ----------
---------- ----------
</TABLE>
V-15
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. DEBT
Long-term debt at February 29 or 28 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Term loans.................................................................... $275,000 $100,000
Short-term debt expected to be refinanced..................................... 100,000 53,000
Industrial Development Revenue Bonds due through 2006 at various prime-based
rates of interest ranging from 5.4% to 6.7%................................. 12,393 14,698
Obligations under capital leases (Note 7)..................................... 13,204 13,285
-------- --------
Total long-term debt.......................................................... 400,597 180,983
Less current installments..................................................... 1,436 2,378
-------- --------
Long-term debt, excluding current installments................................ $399,161 $178,605
-------- --------
-------- --------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. Principal is due in full at maturity with interest
payable periodically at LIBOR plus 0.50 percent. At February 29, 1996, the
interest rate on the term loan was 5.88 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 1996, the interest rate
on the term loan was 5.65 percent.
The Company has the intent and ability to refinance the $100,000,000 of
short-term committed and uncommitted bank borrowings on a long-term basis by
entering into a multi-year term loan with a group of banks. Consequently, the
Company has classified the short-term debt as long-term for financial reporting
purposes. The existing revolving credit agreement could be used for this
purpose, although the Company does not currently intend to do so.
The Company maintains a multi-year, $100,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on
certain money market rates and a commitment fee of 0.13 percent per annum. The
agreement was entered into as of June 30, 1992, was amended and restated as of
June 30, 1995, and terminates June 30, 2000. The agreement provides for annual
one-year extensions of the final maturity beginning on or before June 30, 1996,
and each June 30 thereafter. No amounts were outstanding under the revolving
credit agreement at February 29, 1996, or February 28, 1995.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$13,073,000 at February 29, 1996, and $15,400,000 at February 28, 1995.
The scheduled aggregate annual principal payments on long-term obligations
for the next five years are as follows: 1997 -- $1,436,000; 1998 -- $1,489,000;
1999 -- $1,586,000; 2000 -- $1,743,000; 2001 -- $176,380,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 29, 1996, and February 28, 1995.
Short-term debt includes committed lines of credit and informal credit
arrangements. Amounts outstanding and committed lines of credit available are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Average short-term debt outstanding.............................. $185,789 $134,022 $ 77,392
-------- -------- --------
-------- -------- --------
Maximum short-term debt outstanding.............................. $479,000 $465,000 $355,000
-------- -------- --------
-------- -------- --------
Aggregate committed lines of credit.............................. $255,000 $285,000 $145,000
-------- -------- --------
-------- -------- --------
</TABLE>
The weighted average interest rate on the outstanding short-term debt was
5.9 percent during fiscal 1996, 5.3 percent during fiscal 1995 and 3.3 percent
during fiscal 1994.
V-16
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. DEBT -- Continued
The Company capitalizes interest in connection with the construction of
certain facilities. In fiscal 1996, interest capitalized amounted to $6,780,000
($3,846,000 and $2,626,000 in fiscal 1995 and 1994, respectively).
4. INCOME TAXES
The Company files a consolidated federal income tax return. The components
of the provision for income taxes on earnings before income taxes follow:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Current:
Federal.......................................................... $ 80,678 $ 21,250 $85,680
State............................................................ 4,536 5,730 8,720
-------- -------- -------
85,214 26,980 94,400
-------- -------- -------
Deferred:
Federal.......................................................... 18,891 69,035 (14,790)
State............................................................ 3,520 4,710 (3,010)
-------- -------- -------
22,411 73,745 (17,800)
-------- -------- -------
Provision for income taxes......................................... $107,625 $100,725 $76,600
-------- -------- -------
-------- -------- -------
</TABLE>
The enactment of the Omnibus Tax Reconciliation Act of 1993 on August 10,
1993, increased the federal statutory income tax rate for corporations from 34
percent to 35 percent effective January 1, 1993. This change in the federal tax
rate and the resulting revaluation of the Company's deferred tax asset had a
favorable impact on the fiscal 1994 provision for income taxes. The effective
income tax rate differed from the Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate..................................... 35.0 % 35.0 % 35.0 %
State and local income taxes, net of Federal benefit.................. 2.5 2.5 1.8
Other, net............................................................ -- -- (0.1)
------ ------ ------
Effective income tax rate............................................. 37.5 % 37.5 % 36.7 %
------ ------ ------
------ ------ ------
</TABLE>
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 29, 1996, and February 28, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue............................................................ $ 24,475 $ 32,049
Inventory capitalization.................................................... 3,784 6,482
Accrued expenses............................................................ 34,190 31,815
Other....................................................................... 3,182 5,114
-------- --------
Total gross deferred tax assets.......................................... 65,631 75,460
-------- --------
Deferred Tax Liabilities:
Depreciation and amortization............................................... 39,800 30,510
Prepaid benefit programs.................................................... 886 2,892
Other prepaid expenses...................................................... 9,376 5,347
Other....................................................................... 6,337 5,068
-------- --------
Total gross deferred tax liabilities..................................... 56,399 43,817
-------- --------
Net Deferred Tax Asset........................................................ $ 9,232 $ 31,643
-------- --------
-------- --------
</TABLE>
V-17
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. INCOME TAXES -- Continued
Of the gross deferred tax assets at February 29, 1996, and February 28,
1995, approximately $61 million and $66 million, respectively, can be realized
by carrybacks or offsetting of deferred tax liabilities. Based on the Company's
historical and current pre-tax earnings, management believes the remaining
amount will be realized through future taxable income; therefore, no valuation
allowance is necessary.
5. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) PREFERRED STOCK
In conjunction with the Company's Shareholders Rights Plan, preferred stock
purchase rights were distributed as a dividend at the rate of one right for each
share of the Company's 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
right would entitle shareholders to buy one four-hundredth of a newly issued
share of Cumulative Participating Preferred Stock, Series E, $20 par value, at
an exercise price of $140 per share. A total of 500,000 shares of such preferred
stock, which have preferential dividend and liquidation rights, have been
authorized; 300,000 shares have been reserved. No such shares are outstanding.
In the event that an acquiring person or group acquires the specified ownership
percentage of the Company's common stock (except pursuant to a cash tender offer
for all outstanding shares determined to be fair by continuing directors) or
engages in certain transactions with the Company after the rights become
exercisable, each right will be converted into a right to purchase, for half the
current market price at that time, shares of the Company's common stock valued
at two times the exercise price.
The Company also has 1,500,000 shares of undesignated Preferred Stock
authorized of which no shares are outstanding.
(B) RESTRICTED STOCK
The Company has issued restricted stock under the provisions of the 1994
and 1988 Stock Incentive Plans whereby key employees are granted restricted
shares of the Company's common stock. Shares are awarded in the name of the
employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire three
years from the date of grant. In fiscal 1996, restricted stock awards for
258,775 shares were granted to eligible employees. The market value of these
shares has been recorded as unearned compensation and is a component of
stockholders' equity. Unearned compensation is expensed over the restriction
periods. In fiscal 1996, a total of $3,362,500 was charged to operations
($2,552,500 in 1995 and $2,955,400 in 1994). As of February 29, 1996, 499,279
restricted shares were outstanding.
(C) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan for all employees meeting
certain eligibility criteria. Under the Plan, eligible employees may purchase
shares of the Company's common stock, subject to certain limitations, at 85
percent of its market value. Purchases are limited to 10 percent of an
employee's eligible compensation, up to a maximum of $7,500 per year. At
February 29, 1996, a total of 62,406 shares remained available under the Plan.
During fiscal 1996, 474,889 shares were issued to or purchased on the open
market for employees (537,467 and 436,400 in fiscal 1995 and 1994,
respectively). The average price per share was $29.97, $22.23 and $26.20 in
fiscal 1996, 1995 and 1994, respectively. The purchase price discount is charged
to operations and totaled $2,030,000, $1,760,200 and $1,653,700 in fiscal 1996,
1995 and 1994, respectively.
(D) STOCK INCENTIVE PLANS
Under the Company's stock incentive plans, incentive and non-qualified
stock options may be granted to management, key employees and outside directors
to purchase shares of the Company's common stock. The exercise price for
incentive stock options for employees and non-qualified options for outside
directors is the market value at the date of grant; for non-qualified options
granted under the 1988 Plan for employees, it is at least 85 percent of the
market value at the date of grant (100 percent under the 1994 Plan). Options are
generally exercisable over a period of from one to 10 years from the date of
grant.
V-18
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. CAPITAL STOCK AND STOCK INCENTIVE PLANS -- Continued
Changes in stock options outstanding (and option exercise prices for such
options) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of year ($5.94 to
$33.00)................................................... 3,709,271 3,593,745 3,494,626
Granted ($18.19 to $34.63).................................. 762,384 750,500 562,425
Exercised ($6.25 to $25.13)................................. (644,806) (260,234) (316,243)
Cancelled ($6.25 to $33.00)................................. (264,143) (374,740) (147,063)
---------- ---------- ----------
Options outstanding at end of year ($5.94 to $34.63)........ 3,562,706 3,709,271 3,593,745
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at end of year ($5.94 to $33.00)........ 1,847,169 2,070,319 1,662,032
---------- ---------- ----------
---------- ---------- ----------
Shares available for grant at end of year (options and
restricted stock)......................................... 2,147,207 2,759,698 1,010,488
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The stock incentive plans provide for the granting of stock appreciation
rights (SARs) in tandem with non-qualified stock option grants at the discretion
of the board of directors' compensation and personnel committee. The SARs
granted to date become fully exercisable only upon a change of control, as
defined, of the Company, notwithstanding other conditions of exercisability of
the options. The SARs permit the optionee to surrender an exercisable SAR for an
amount equal to the excess of the market price of the common stock over the
option price when the right is exercised. Market value is defined as the greater
of the highest closing price of the Company's stock during the 90 days preceding
the change of control or the closing price on the date preceding the exercises.
As of February 29, 1996, 5,895,967 non-qualified options with related SARs had
been granted with such terms (5,417,163 in 1995 and 4,888,333 in 1994).
6. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of this program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of the
Company's common stock at February 29, 1996, and February 28, 1995.
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR
28
----------------------------
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Service cost of benefits earned during the year........................ $ 5,896 $4,485 $ 3,916
Interest cost on projected benefit obligation.......................... 3,632 2,715 2,351
Actual return on plan assets........................................... (9,277) (102) (3,632)
Net amortization....................................................... 6,314 (3,452) 1,212
------- ------ -------
Net pension expense.................................................... $ 6,565 $3,646 $ 3,847
------- ------ -------
------- ------ -------
</TABLE>
V-19
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. PENSION PLAN -- Continued
Contributions of $1,160,000, $3,710,000 and $4,503,000 were required in
fiscal 1996, 1995 and 1994, respectively.
The following table sets forth the Plan's financial status and amounts
recognized in the consolidated balance sheets as of February 29 or 28:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested....................................................................... $ 39,505 $ 25,983
Non-vested................................................................... 5,136 3,720
-------- --------
Total benefits................................................................. 44,641 29,703
Additional amounts related to projected salary increases....................... 22,747 15,910
-------- --------
Projected benefit obligation for services rendered to date..................... 67,388 45,613
Plan assets at fair value...................................................... (47,093) (37,046)
-------- --------
Projected benefit obligation in excess of plan assets.......................... 20,295 8,567
Unrecognized loss from past experience......................................... (14,117) (8,102)
Unrecognized prior service cost................................................ 875 981
Unrecognized net obligation being recognized over 15 years..................... 1,212 1,414
-------- --------
Accrued pension cost........................................................... $ 8,265 $ 2,860
-------- --------
-------- --------
</TABLE>
Assumptions used in the accounting for the pension plan were:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR
28
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate.................................. 7.0% 8.0% 7.5%
Rate of increase in compensation levels......................... 6.0% 6.5% 6.0%
Rate of return on plan assets................................... 9.0% 8.0% 9.0%
---- ---- ----
</TABLE>
7. LEASE COMMITMENTS
The Company conducts a substantial portion of its business in leased
premises. The Company's lease obligations are based upon contractual minimum
rates. For certain locations, amounts in excess of these minimum rates are
payable based upon specified percentages of sales. Rental expense and sublease
income for all operating leases are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Minimum rentals.................................................... $148,082 $118,042 $96,110
Rentals based on sales volume...................................... 2,871 2,513 1,910
Sublease income.................................................... (9,996) (8,875) (8,441)
-------- -------- -------
Net................................................................ $140,957 $111,680 $89,579
-------- -------- -------
-------- -------- -------
</TABLE>
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, many with rent escalations based on
the Consumer Price Index. Most provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 25 years at terms substantially the same as the initial
terms.
V-20
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. LEASE COMMITMENTS -- Continued
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Company, as of February 29, 1996, were:
<TABLE>
<CAPTION>
OPERATING OPERATING
CAPITAL LEASE SUBLEASE
FISCAL LEASES COMMITMENTS INCOME
- ---------------------------------------------------------------- ------- ----------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
1997............................................................ $ 1,541 $ 163,577 $(10,618)
1998............................................................ 1,541 163,964 (9,316)
1999............................................................ 1,579 161,498 (7,759)
2000............................................................ 1,662 159,327 (6,980)
2001............................................................ 1,681 158,105 (5,987)
After 2001...................................................... 21,683 1,791,524 (35,165)
------- ----------- --------
Total minimum lease payments.................................... 29,687 $2,597,995 $(75,825)
----------- --------
----------- --------
Less amounts representing interest.............................. 16,483
-------
Present value of net minimum capital lease payments
(Note 3)...................................................... $13,204
-------
-------
</TABLE>
In fiscal 1996, the Company entered into sale-leaseback transactions with
unrelated parties at an aggregate selling price of $183,900,000 ($85,970,000 in
fiscal 1995 and $87,980,000 in fiscal 1994). The Company does not have
continuing involvement under the sale-leaseback transactions.
8. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying consolidated statements of earnings,
amounted to $324,335,000, $262,969,000 and $211,022,000 (4.6 percent, 4.7
percent and 5.1 percent of net sales and operating revenues) in fiscal years
1996, 1995 and 1994, respectively.
9. SECURITIZATIONS
(A) CREDIT CARD SECURITIZATIONS
The Company uses securitization transactions, which allow for the sale of
credit card receivables to unrelated entities, to finance the consumer revolving
credit receivables generated by First North American National Bank, its wholly
owned credit card bank subsidiary (the "Bank Subsidiary"). No gain or loss has
been recorded on these sales. Proceeds from securitization transactions were
$692.3 million, $428.4 million and $214.6 million for fiscal 1996, 1995 and
1994, respectively. At February 29 or 28, the following amounts were
outstanding:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables................................................... $1,860,459 $1,181,954
Interest retained by Company.............................................. (110,459) (124,206)
---------- ----------
Net receivables transferred............................................... $1,750,000 $1,057,748
---------- ----------
---------- ----------
Net receivables transferred with recourse................................. $ 760,000 $1,057,748
---------- ----------
---------- ----------
Program capacity.......................................................... $1,910,000 $1,060,000
---------- ----------
---------- ----------
</TABLE>
The Bank Subsidiary finances its private-label credit card program through
a single master trust, through both private placement and the public market.
During fiscal 1996, the Bank Subsidiary placed an additional $300 million in the
public market for a total program capacity of $1,060 million. The master trust
vehicle permits further expansion of the securitization programs to meet future
receivables growth. The recourse provisions under the private-label
securitization programs were eliminated during fiscal 1996.
V-21
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. SECURITIZATIONS -- Continued
In addition, the Bank Subsidiary has an asset securitization program in
place for its bankcard receivables that allows the transfer of up to $850
million in receivables as of February 29, 1996. The bankcard securitization
agreements provide recourse to the Company for any cash flow deficiencies if the
monthly credit card cash flows from finance charges are inadequate to cover such
expenses. The Company believes that as of February 29, 1996, no liability
existed under these recourse provisions. The finance charges from the
transferred receivables are used to fund interest costs, charge-offs, servicing
fees and other related costs. The Bank Subsidiary's servicing revenue totaled
$142.9 million, $77.8 million and $54.5 million for fiscal 1996, 1995 and 1994,
respectively.
(B) AUTO LOAN SECURITIZATION
In fiscal 1996, the Company entered into a securitization transaction to
finance the consumer installment credit receivables generated by First North
American Credit Corporation, an installment lending division of the Company. No
gain or loss has been recorded on this sale. Proceeds from the auto loan
securitization transaction were $87 million during fiscal 1996. At February 29,
1996, the following amounts were outstanding:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables................................................................... $ 93,065
Interest retained by Company.............................................................. (6,065)
--------
Net receivables transferred with recourse................................................. $ 87,000
--------
--------
Program capacity.......................................................................... $100,000
--------
--------
</TABLE>
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. The securitization agreement
provides recourse to the Company for any cash flow deficiencies if the monthly
auto loan installment cash flows from finance charges are inadequate to cover
such expenses. The Company believes that as of February 29, 1996, no liability
existed under the recourse provision. As of April 1, 1996, the program capacity
increased to $125 million.
10. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year swaps with notional
amounts totaling $300 million relating to the public issuance of securities by
the master trust. As part of this issuance, $344 million of five-year,
fixed-rate certificates were issued to fund consumer credit receivables. The
Bank Subsidiary is servicer for the accounts, and as such, receives its monthly
cash portfolio yield after deducting interest, charge-offs and other related
costs. The underlying receivables are based on a floating rate. The swaps were
put in place to better match funding costs to the receivables being securitized.
As a result, the master trust pays fixed-rate interest while the Company
utilizes the swaps to convert the fixed-rate obligation to a floating-rate,
LIBOR-based obligation. The fair value of the swaps is the amount at which they
could be settled based on estimates obtained from the counterparties, which are
two banks highly rated by several financial rating agencies. Recording the swaps
at fair value at February 29, 1996, and February 28, 1995, would result in gains
of $19.4 million and $6.3 million, respectively.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year swaps with notional amounts aggregating
$175 million. These swaps effectively converted the variable-rate obligation
into a fixed-rate obligation. The fair value of the swaps is the amount at which
they could be settled. This value is based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, would result
in a loss of $2.5 million.
In November 1995, the Company entered into a 50-month amortizing swap in
the notional amount of $75 million relating to the auto loan receivable
securitization to convert variable-rate financing costs to a fixed-rate
obligation. The underlying receivables are issued with a fixed-rate finance
charge. The swap was put in place to better match the variable funding costs to
the receivables being securitized and to preserve net portfolio yield. Recording
the swap at fair value at February 29, 1996, would result in a loss of $0.3
million.
V-22
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. INTEREST RATE SWAPS -- Continued
The market and credit risks associated with these swaps are similar to
those relating to other types of financial instruments. Market risk is the
exposure created by potential fluctuations in interest rates and is directly
related to the product type, agreement terms and transaction volume. The Company
does not anticipate significant market risk from swaps, since their use is to
more closely match funding costs to the use of the funding. Credit risk is the
exposure created by potential nonperformance of another party to an agreement.
The Company mitigates credit risk by dealing with highly rated counterparties.
11. 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.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
---------------------- ---------------------- ---------------------- ---------------------- ----------
1996 1995 1996 1995 1996 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating
revenues.............. $1,391,658 $1,048,695 $1,600,805 $1,218,572 $1,783,446 $1,405,445 $2,253,214 $1,910,235 $7,029,123
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ $ 319,886 $ 263,677 $ 368,292 $ 309,617 $ 405,134 $ 336,049 $ 541,518 $ 475,657 $1,634,830
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings............ $ 24,618 $ 19,688 $ 41,246 $ 36,055 $ 31,451 $ 28,442 $ 82,060 $ 83,690 $ 179,375
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings per
share................. $ 0.25 $ 0.20 $ 0.42 $ 0.37 $ 0.32 $ 0.29 $ 0.83 $ 0.86 $ 1.82
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
1995
----------
<S> <C>
(AMOUNTS IN THOUSANDS EX
Net sales and operating
revenues.............. $5,582,947
----------
Gross profit............ $1,385,000
----------
Net earnings............ $ 167,875
----------
Net earnings per
share................. $ 1.72
----------
</TABLE>
V-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CIRCUIT CITY STORES, INC.:
We have audited the accompanying consolidated balance sheets of Circuit
City Stores, Inc. and subsidiaries as of February 29, 1996 and February 28, 1995
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the fiscal years in the three-year period ended February
29, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circuit City
Stores, Inc. and subsidiaries as of February 29, 1996 and February 28, 1995 and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended February 29, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Richmond, Virginia
April 3, 1996
V-24
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating revenues..................................... $1,767,043 $1,600,805 $3,382,309 $2,992,463
Cost of sales, buying and warehousing................................ 1,370,715 1,232,513 2,623,711 2,304,285
---------- ---------- ---------- ----------
Gross profit......................................................... 396,328 368,292 758,598 688,178
---------- ---------- ---------- ----------
Selling, general and administrative expenses......................... 340,871 298,158 669,386 574,808
Interest expense..................................................... 4,557 4,174 11,226 8,017
---------- ---------- ---------- ----------
Total expenses....................................................... 345,428 302,332 680,612 582,825
---------- ---------- ---------- ----------
Earnings before income taxes......................................... 50,900 65,960 77,986 105,353
Provision for income taxes........................................... 19,317 24,714 29,620 39,489
---------- ---------- ---------- ----------
Net earnings......................................................... $ 31,583 $ 41,246 $ 48,366 $ 65,864
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
and common share equivalents....................................... 99,403 98,814 99,292 98,672
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per share............................................... $ 0.32 $ 0.42 $ 0.49 $ 0.67
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends paid per common share...................................... $ 0.035 $ 0.030 $ 0.065 $ 0.055
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
V-25
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUG. 31, 1996 FEB. 29, 1996
------------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................................... $ 34,224 $ 43,704
Net accounts and notes receivable.............................................................. 421,789 324,395
Merchandise inventory.......................................................................... 1,388,658 1,323,183
Deferred income taxes.......................................................................... 10,667 26,996
Prepaid expenses and other current assets...................................................... 28,826 17,399
------------- -------------
TOTAL CURRENT ASSETS........................................................................ 1,884,164 1,735,677
Property and equipment, net...................................................................... 828,697 774,265
Other assets..................................................................................... 17,881 16,080
------------- -------------
TOTAL ASSETS..................................................................................... $ 2,730,742 $ 2,526,022
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt......................................................... $ 1,462 $ 1,436
Accounts payable............................................................................... 714,997 604,488
Short-term debt................................................................................ 175,461 92,087
Accrued expenses and other current liabilities................................................. 91,864 133,164
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 983,784 831,175
Long-term debt, excluding current installments................................................... 429,501 399,161
Deferred revenue and other liabilities........................................................... 184,054 214,001
Deferred income taxes............................................................................ 19,194 17,764
------------- -------------
TOTAL LIABILITIES........................................................................... 1,616,533 1,462,101
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value; 250,000,000 shares authorized;
97,910,000 shares issued and outstanding, August 31, 1996................................... 48,955 48,690
Capital in excess of par value................................................................. 98,433 90,432
Retained earnings.............................................................................. 966,821 924,799
------------- -------------
TOTAL STOCKHOLDERS' EQUITY.................................................................. 1,114,209 1,063,921
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................................... $ 2,730,742 $ 2,526,022
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
V-26
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings $ 48,366 $ 65,864
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization.................................................................. 48,797 38,296
(Gain) loss on sales of property and equipment................................................. (2,088) 2,732
Provision for deferred income taxes............................................................ 17,759 8,845
Decrease in deferred revenue and other liabilities............................................. (29,947) (31,012)
Increase in net accounts and notes receivable.................................................. (97,394) (160,359)
Increase in merchandise inventory, prepaid expenses and other current assets................... (76,902) (261,405)
Increase in other assets....................................................................... (1,801) (3,136)
Increase in accounts payable, accrued expenses and other current liabilities................... 69,209 120,342
--------- ---------
Net cash used in operating activities............................................................. (24,001) (219,833)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment............................................................... (227,182) (245,409)
Proceeds from sales of property and equipment..................................................... 126,041 81,784
--------- ---------
Net cash used in investing activities............................................................. (101,141) (163,625)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt......................................................... 83,374 260,000
Proceeds from issuance of long-term debt.......................................................... 31,311 122,000
Principal payments on long-term debt.............................................................. (945) (978)
Proceeds from issuance of common stock, net....................................................... 8,266 7,392
Dividends paid.................................................................................... (6,344) (5,329)
--------- ---------
Net cash provided by financing activities......................................................... 115,662 383,085
--------- ---------
Decrease in cash and cash equivalents............................................................... (9,480) (373)
Cash and cash equivalents at beginning of year...................................................... 43,704 46,962
--------- ---------
Cash and cash equivalents at end of period.......................................................... $ 34,224 $ 46,589
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
V-27
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Circuit City Stores, Inc. and its
subsidiaries (the Company) conform to generally accepted accounting principles.
The interim period financial statements are unaudited; however, in the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim consolidated financial
statements have been included. The fiscal year-end balance sheet data was
derived from audited financial statements. The consolidated financial statements
included herein should be read in conjunction with the notes to consolidated
financial statements included in the Company's 1996 annual report to
stockholders.
2. DEBT
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150 million
unsecured revolving credit agreement with a group of banks. This facility
replaced a similar $100 million facility.
3. INTEREST RATE SWAPS
Recording the Company's interest rate swaps at fair value at August 31,
1996, would result in a gain of approximately $13.9 million compared to a gain
of $16.6 million at February 29, 1996. The notional amount of the swaps was
approximately $539 million at August 31, 1996, and $550 million at February 29,
1996.
V-28
<PAGE>
ANNEX VI
CIRCUIT CITY GROUP
DESCRIPTION OF BUSINESS
GENERAL. The Circuit City Group is the nation's largest retailer of
brand-name consumer electronics and major appliances and a leading retailer of
personal computers and music software. It sells video equipment, including
televisions, digital satellite systems, video cassette recorders and camcorders;
audio equipment, including home stereo systems, compact disc players, tape
recorders and tape players; mobile electronics, including car stereo systems and
security systems; home office products, including personal computers, peripheral
equipment and facsimile machines; other consumer electronics products, including
cellular phones, telephones and portable audio and video products; entertainment
software; and major appliances, including washers, dryers, refrigerators,
microwave ovens and ranges.
Each of Circuit City Group's store locations follows detailed operating
procedures and merchandising programs. Included are procedures for inventory
maintenance, advertising, customer relations, store administration, merchandise
display, store security and the demonstration and sale of products. Each store
carries a standard line of products selected at the corporate level and supplied
directly to the stores by the Circuit City Group's regional warehouse
distribution facilities.
EXPANSION. The Circuit City Group's goal is to maximize profitability in
each market it serves by capturing large market shares that produce high sales
volumes across a broad merchandise mix.
MERCHANDISING. Because the Circuit City Group believes that local markets
have individual characteristics which vary greatly by the advertising,
merchandising and pricing strategies of competitors, it has organized its
marketing function to focus on markets with similar competitive conditions. The
Circuit City Group's operating regions benefit from a centralized buying
organization. The central buying staff reduces costs by purchasing in large
volumes, structures a sound basic merchandising program and is supported by
advanced management information and distribution systems.
The Circuit City Group's merchandising strategy emphasizes a broad
selection of products, including introductory products, and a wide range of
prices. Merchandise mix and displays are controlled centrally in an effort to
ensure a high level of consistency from store to store. Merchandise pricing and
selling strategies vary by market to reflect competitive conditions.
Although suggested retail prices are established by Circuit City Group's
central merchandising department, each store manager is responsible for shopping
the local competition on a regular basis and has the authority to adjust retail
prices to meet market conditions. As part of its competitive strategy, the
Circuit City Group advertises low prices and provides each customer with a
low-price guarantee. The Circuit City Group will beat any legitimate price from
a local competitor stocking the same new item in a factory-sealed box. If a
customer finds a lower price, including the Circuit City Group's own sale price,
within 30 days, the Circuit City Group will refund 110 percent of the difference
to the customer.
SUPPLIERS. During fiscal 1996, the Circuit City Group's 10 largest
suppliers accounted for approximately 52 percent of merchandise purchased by the
Circuit City Group. The Circuit City Group's major suppliers include Sony,
Packard Bell, Thomson, Panasonic, Hitachi, NEC, Whirlpool, Hewlett Packard,
Zenith, and JVC. Brand-name advertised products are sold by all of the Circuit
City Group's retail locations. The Circuit City Group has no significant
long-term contracts for the purchase of merchandise.
In the past, the Circuit City Group has not experienced any continued or
ongoing difficulty obtaining satisfactory sources of supply and believes that
adequate sources of supply exist for the types of merchandise sold in its
stores.
ADVERTISING. The Circuit City Group relies on considerable amounts of
advertising to stimulate Superstore and electronics-only store sales.
Expenditures for these items were 4.7 percent of sales in fiscal 1996 (4.7
percent and 5.1 percent in fiscal 1995 and 1994, respectively). Also, as the
Circuit City Group adds new stores in existing markets, the increased sales
volume improves the efficiency of existing advertising expenditures. The Circuit
City Group primarily uses print advertising, including multi-page vehicles and
run-of-press newspaper ads, for Superstore and electronics-only store
advertising. The Circuit City Group emphasizes the use of multi-page vehicles to
allow a more extensive presentation of the broad selection of products and price
ranges it carries. These multi-page vehicles are generally distributed in
newspapers but are, in some cases, mailed directly to residences outside the
newspapers' area of circulation. With a presence in most major metropolitan
markets, the Circuit City Group has begun, on a limited basis, to take advantage
of national broadcast and print advertising opportunities. Television campaigns
include merchandise assortment, price and customer service messages.
VI-1
<PAGE>
COMPETITION. The brand-name consumer electronics and major appliance
business engaged in by the Circuit City Group is highly competitive. The Circuit
City Group's competitors include other full-service retailers, self-service
retailers, specialty retailers with differing product selections and services,
general merchandise retailers and local independent operators. Over the past
three years, the Circuit City Group's competition has shifted to include more
self-service retailers that often offer a more limited product selection but at
highly competitive prices.
The Circuit City Group uses pricing, selection and service to differentiate
itself from the competition. As part of its competitive strategy, the Circuit
City Group strives to maintain highly competitive prices and offers every
customer the low-price guarantee previously described. The Circuit City Group's
Superstores offer a broad product selection that includes 3,200 to 4,000
name-brand items (excluding music software), depending on the selling square
footage of the Superstore. Professionally trained sales counselors, convenient
credit options, factory-authorized product repair, home delivery, installation
centers for automotive electronics, a toll-free product support line and a
30-day return policy reflect the Circuit City Group's strong commitment to
customer service.
CUSTOMER SATISFACTION. Extensive market research is conducted to measure
the Circuit City Group's customer service record and to refine the Circuit City
Group's consumer offer. More than 300,000 random telephone surveys are conducted
each year to track satisfaction among the Circuit City Group's existing customer
base. These surveys, conducted from customer transaction records, measure
satisfaction with all points of customer interaction, including sales
counselors, cashiers, the warehouse staff, the Roadshop installers and home
delivery and product service representatives. Quick feedback allows the Circuit
City Group to immediately address individual performance issues. Customer
Service Index scores for each store recognize strong overall performance and
quickly pinpoint management issues that require attention.
TRAINING. The Circuit City Group staffs its stores with commissioned sales
counselors, support personnel (cashiers and stockpersons), a store manager, one
or more sales managers and, in larger stores, an operations manager. New sales
counselors complete a minimum two-week training program focused on product
knowledge, customer service and store operations. Seven regional training
facilities are utilized for classroom sessions taught by more than 40
professional trainers, and a state-of-the-art video facility produces audio,
video and computer-based training materials. Formalized training for store,
sales and operations managers focuses on human resource management, sales
management and critical operating procedures. Individual development plans
address personal training needs, giving Associates advancement opportunity.
CONSUMER CREDIT. Because consumer electronics, personal computers and major
appliances represent relatively large purchases for the average consumer, the
Circuit City Group'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 1996, approximately 18 percent of the Circuit City Group's total sales
were made through its private-label credit card and 44 percent through
third-party credit sources.
The Group's credit card bank operation, First North American National Bank
(FNANB), was established in fiscal 1991 to handle its private-label credit card
business. The credit card operation is located in Marietta, Georgia. Interfacing
FNANB with the Circuit City Group's point-of-sale (POS) system has produced a
rapid customer credit approval process. A customer's application can be
electronically scored, and qualified customers can generally receive approval in
under one minute. In addition to increased credit availability, the
private-label credit card program provides the Circuit City Group with
additional marketing opportunities, including direct mail campaigns to credit
card customers and special financing programs for promotions. FNANB's credit
extension, customer service and collection operations are fully automated with
state-of-the-art technology to maintain the highest possible level of customer
service. This technology aids FNANB's aggressive collection philosophy, which is
comprised of early and frequent contact with delinquent customers.
FNANB also manages a growing bankcard portfolio. Receivables generated by
both the private-label credit card and bankcard programs are sold to
non-affiliated entities under asset securitization programs.
SYSTEMS. The Circuit City Group's in-store POS system maintains an on-line
record of all transactions and allows performance to be tracked by region, store
and individual sales counselor. The information gathered by the system supports
automatic replenishment of in-store inventory from the regional distribution
centers and is incorporated into the Circuit City Group's product buying
decisions. The POS system is interfaced with the credit approval system of
FNANB. In the stores, electronic signature capture for all credit card
purchases, bar code scanning for product returns and repairs, automatic price
tag printing for price changes and computerized home delivery scheduling all
enhance the Circuit City Group's customer service, eliminating time-consuming
administrative tasks for store Associates and reducing costs through smoother
store-level execution.
VI-2
<PAGE>
The Circuit City Group's proprietary Customer Service Information System
maintains an on-line history of customer purchases and enables the Circuit City
Group to better assist individuals with future purchases by ensuring that new
products can be integrated with existing products in the home. It also
facilitates product returns and product repair. In addition, this system
supports our toll-free product support line. The product support line provides
the Circuit City Group's customers with access to skilled product specialists.
From their homes, customers can receive immediate answers to basic questions
regarding product usage and installation. This service is available only for
products purchased at Circuit City.
DISTRIBUTION. Currently, the Circuit City Group operates nine automated
electronic distribution centers. These centers are designed to serve stores
within a 500-mile range. They utilize conveyor systems with laser bar code
scanners to reduce labor requirements, prevent inventory damage and maintain
inventory control. The Circuit City Group also operates smaller distribution
centers handling primarily appliances and larger electronics products. The
Circuit City Group believes that the use of the distribution centers enables it
to efficiently distribute a broad selection of merchandise to its stores, reduce
inventory requirements at individual stores, benefit from volume purchasing and
maintain accounting control. In addition, the Circuit City Group operates an
automated, centralized distribution center for music software. Virtually all of
the Circuit City Group's Superstore and electronics-only store merchandise is
distributed through its distribution centers.
SERVICE. The Circuit City Group offers service and repair for nearly all
the products it sells. Customers also are able to purchase extended warranty
plans on most of the merchandise the Circuit City Group sells.
Currently, the Circuit City Group has 34 regional, factory-authorized
repair facilities. To meet customer needs, merchandise needing service or repair
usually is moved by truck from the stores to the Circuit City Group's nearest
regional service facility and is returned to the customer at the store after
repair. The Circuit City Group also has in-home technicians who service large
items not conveniently carried to a store.
Extended warranty plans extend coverage beyond the normal manufacturer's
warranty period, usually with terms of coverage (including the manufacturer's
warranty period) between 12 and 60 months. Late in fiscal 1994, the Circuit City
Group began selling two new extended warranty programs on behalf of unrelated
third parties that issue these plans for merchandise sold by the Circuit City
Group and other retailers. One of these programs is sold in most major markets
and features in-home service for personal computer products. The second program
covers consumer electronics and major appliances and was offered by
approximately three-fourths of the Circuit City Group's Superstores at November
30, 1996. The Circuit City Group sells its own extended warranty contracts in
markets where the third-party programs are not available.
SEASONALITY. Like other retail businesses, the Circuit City Group's sales
are greater in the fourth quarter of the fiscal year than in other periods of
the fiscal year because of holiday buying patterns. A corresponding pre-seasonal
inventory build-up is associated with this sales volume. This increased sales
volume results in a lower ratio of fixed costs to sales and produces a higher
ratio of operating income to sales in the fourth fiscal quarter.
EMPLOYEES. On November 30, 1996, the Circuit City Group had 25,485 hourly
and salaried employees and 18,162 sales employees working on a commission basis.
Additional personnel are employed during peak selling seasons. Management of the
Circuit City Group considers its relationship with its employees to be good.
None of the Circuit City Group's employees is subject to a collective bargaining
agreement.
VI-3
<PAGE>
CIRCUIT CITY GROUP
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS.................................................................................. VI-5
FINANCIAL STATEMENTS
Statements of Earnings -- Years Ended February 29 or 28, 1996, 1995 and 1994........................................ VI-10
Balance Sheets -- February 29 or 28, 1996 and 1995.................................................................. VI-11
Statements of Cash Flows -- Years Ended February 29 or 28, 1996, 1995 and 1994...................................... VI-12
Statements of Group Equity -- Years Ended February 29 or 28, 1996, 1995 and 1994.................................... VI-13
Notes to Group Financial Statements................................................................................. VI-14
Report of KPMG Peat Marwick LLP, Independent Auditors............................................................... VI-25
INTERIM FINANCIAL STATEMENTS
Statements of Earnings -- Six Months Ended August 31, 1996 and 1995 (unaudited)..................................... VI-26
Balance Sheets -- August 31, 1996 (unaudited) and February 29, 1996................................................. VI-27
Statements of Cash Flows -- Six Months Ended August 31, 1996 and 1995 (unaudited)................................... VI-28
Notes to Group Financial Statements (unaudited)..................................................................... VI-29
</TABLE>
VI-4
<PAGE>
CIRCUIT CITY GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS -- FISCAL YEARS 1996, 1995 AND 1994
SALES GROWTH
Total sales increased 23 percent in fiscal 1996, to $6.75 billion. In
fiscal 1995, total sales were $5.51 billion, a 34 percent increase from $4.11
billion in fiscal 1994.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
<TABLE>
<CAPTION>
CIRCUIT CITY GROUP
---------------------
ALL COMPARABLE INDUSTRY
FISCAL STORES STORES SALES*
------ ---------- --------
<S> <C> <C> <C>
1996.................................................. 23% 5% 6%
1995.................................................. 34% 15% 11%
1994.................................................. 26% 8% 7%
1993.................................................. 17% 7% 7%
1992.................................................. 18% 1% 0%
</TABLE>
* THE INDUSTRY SALES RATES ARE DERIVED FROM ELECTRONICS INDUSTRIES
ASSOCIATION, ASSOCIATION OF HOME APPLIANCE MANUFACTURERS, RECORDING
INDUSTRY ASSOCIATION OF AMERICA AND ESTIMATES OF AUDIO, VIDEO, HOME
OFFICE, TELECOMMUNICATIONS, APPLIANCE AND MUSIC SOFTWARE SALES. MUSIC
SOFTWARE IS INCLUDED IN INDUSTRY SALES PRIOR TO FISCAL 1995. IN THOSE
YEARS, THE CIRCUIT CITY GROUP WAS NOT A SIGNIFICANT PARTICIPANT IN THIS
CATEGORY.
CIRCUIT CITY GROUP OPERATIONS. The Circuit City Group's (the "Group's")
total sales growth primarily reflects continued expansion of the Superstore base
and strong comparable store sales growth from the Group's operations during most
of the last three years. In fiscal 1996, the Group opened a net of 66
Superstores compared with 59 Superstores in the previous fiscal year. Twelve of
the fiscal 1996 stores opened in the last month of the year. The Group entered
the following major metropolitan markets: Buffalo, NY.; Denver, Colo.; Hartford,
Conn.; Milwaukee, Wisc.; Rochester, N.Y.; Salt Lake City, Utah; and Springfield,
Mass. The Group also opened stores in smaller markets, added stores to existing
markets and replaced or expanded 15 stores.
The Group operates four Circuit City Superstore formats with square footage
and merchandise assortments tailored to population and volume expectations for
specific trade areas. With these formats, the Group can penetrate virtually
every market in the U.S. The "D" format was developed in fiscal 1995 to serve
the most populous trade areas. Selling space in the "D" format averages abut
23,000 square feet with total square footage averaging 42,242. The "D" stores
offer the largest merchandise assortment of all the formats. The "C" format
constitutes the largest percent of the store base. Selling square footage in
this format has been increased during the last several years, and new "C" stores
typically have about 17,000 square feet of selling space. Total square footage
for all "C" stores averages 33,828. The "B" format often is located in smaller
markets or in trade areas that are on the fringes of larger metropolitan
markets. Selling space in these stores averages approximately 11,000 square feet
with an average total square footage of 24,685. The "B" stores offer a broad
merchandise assortment that maximizes return on investment in these lower volume
areas. The "A" format serves the least populated trade areas. Selling space
averages approximately 9,000 square feet, and total square footage averages
18,026. The "A" stores feature a layout, staffing levels and merchandise
assortment that creates high productivity in the smallest markets.
The Group also operates 36 mall-based Circuit City Express stores. These
stores are located in regional malls, are approximately 2,000 to 3,000 square
feet in size and sell small, gift-oriented items. During fiscal 1996, the Group
opened five Circuit City Express stores and closed four stores located in
underperforming malls.
VI-5
<PAGE>
STORE MIX
<TABLE>
<CAPTION>
RETAIL UNITS AT YEAR END
----------------------------------------
FISCAL 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Superstore
"D" Superstore...................................... 61 12 -- -- --
"C" Superstore...................................... 259 257 219 188 170
"B" Superstore...................................... 46 37 30 24 11
"A" Superstore...................................... 12 6 4 2 2
Electronics-Only...................................... 5 5 7 7 11
Circuit City Express.................................. 36 35 34 39 34
---- ---- ---- ---- ----
Total................................................. 419 352 294 260 228
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Over the past three years, industry growth in personal computers has driven
strong comparable store sales increases. During the first half of fiscal 1996,
rapid PC sales growth and relatively strong demand for consumer electronics and
major appliances contributed to a 10 percent comparable store sales increase.
Challenging prior year sales comparisons and softer industry sales in all
categories led to a more modest increase of 1 percent for the second half and 5
percent for the full year. Based on market research and sales performance, the
Group believes that it continues to maintain substantial shares in existing
markets and to build significant shares in new markets.
Gross dollar sales from all extended warranty programs were 5.9 percent of
sales in fiscal year 1996, compared with 5.8 percent in both fiscal 1995 and
1994. Total extended warranty revenue, which is reported in total sales, was 5.1
percent of sales in fiscal year 1996, 5.4 percent in fiscal year 1995 and 4.8
percent in fiscal year 1994. The gross profit margins on products sold with
extended warranties are higher than the gross profit margins on products sold
without extended warranties. Late in fiscal 1994, the Group began selling two
new extended warranty programs on behalf of unrelated third parties that issue
these plans for merchandise sold by the Group and other retailers. One of these
programs is sold in most major markets and features in-home service for personal
computer products. The second program covers electronics and major appliances
and at year-end was offered by approximately two-thirds of the Superstores. The
remaining stores sell a Circuit City extended warranty. Under the third-party
programs, the Group acts as seller for the unrelated third parties and has no
contractual liability to the customer under the extended warranty plans.
Commission revenue from the third-party extended warranty plans is recognized
immediately while revenue from Circuit City extended warranties is deferred and
amortized on a straight-line basis over the life of the contracts. In fiscal
1996, the increase in third-party revenue was more than offset by a decrease in
revenue recognized from Circuit City contracts sold in prior periods. The
increase in third-party warranty sales contributed to the growth in total
extended warranty revenue from fiscal 1994 to fiscal 1995. Third-party extended
warranty revenue was 3.0 percent of total sales in fiscal 1996, 2.3 percent in
fiscal 1995 and 0.7 percent in fiscal 1994. The Group expects third-party
extended warranty revenue to continue increasing in fiscal 1997.
SUPERSTORE SALES PER TOTAL SQUARE FOOT
<TABLE>
<CAPTION>
FISCAL
<S> <C>
1996................................................................................................................. $577
1995................................................................................................................. $584
1994................................................................................................................. $523
1993................................................................................................................. $487
1992................................................................................................................. $460
</TABLE>
SUPERSTORE SALES PER TOTAL SQUARE FOOT. Over the last five years, the Group
has significantly increased the percentage of store square footage devoted to
selling space. Expanded merchandise assortments and additional product
categories such as personal computers and music software contribute to higher
sales per total square foot in some stores. In fiscal 1995, the total square
footage of new stores began to increase. The larger stores generate high sales
volumes in specific trade areas but have lower sales per total square foot than
smaller Superstores. As a result, Superstore sales per total square foot
declined in fiscal 1996.
VI-6
<PAGE>
SALES BY MERCHANDISE CATEGORIES*
<TABLE>
<CAPTION>
FISCAL 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
TV.................................................... 17 % 19 % 20 % 23 % 23 %
VCR/Camcorders........................................ 13 % 14 % 17 % 19 % 20 %
Audio*................................................ 19 % 22 % 23 % 23 % 26 %
Home Office........................................... 26 % 20 % 12 % 7 % 5 %
Appliances............................................ 14 % 15 % 18 % 19 % 19 %
Other*................................................ 11 % 10 % 10 % 9 % 7 %
---- ---- ---- ---- ----
Total................................................. 100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
* IN FISCAL 1996, THE GROUP MOVED CELLULAR PHONES FROM THE "AUDIO" CATEGORY
TO THE "OTHER" CATEGORY AND MOVED CERTAIN AUDIO PRODUCTS FROM THE "OTHER"
CATEGORY TO THE "AUDIO" CATEGORY. SALES OF THESE PRODUCTS HAVE BEEN
RECLASSIFIED FOR PRIOR YEARS.
SALES BY MERCHANDISE CATEGORIES. Home office products, primarily personal
computers, have increased dramatically as a percentage of sales during the past
five years. This growth reflects a rapid increase in household penetration of
this product and the strength of Circuit City's consumer offer in the category.
Within the consumer electronics categories, the greatest sales growth has
occurred among the fully featured products such as large-screen televisions and
SurroundSound audio systems. A lack of new product features and declining retail
prices for small-screen televisions and video cassette recorders have limited
sales growth in the video categories. A proliferation of retail outlets and
increased household penetration have reduced cellular phone sales, which are
included in "Other."
IMPACT OF INFLATION. Inflation has not been a significant contributor to
industry growth or to the Group's sales growth during the last five years. The
Group expects no significant change in this trend. Because the Group purchases
substantially all products, including consumer electronics, in U.S. dollars,
prices are not directly impacted by the value of the dollar in relation to other
foreign currencies, including the Japanese yen.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin declined to 23.9 percent of sales in fiscal 1996
compared with 25.1 percent in fiscal 1995 and 26.8 percent in fiscal 1994. The
gross profit margin trend reflects growth in personal computer sales, which
produce gross profit margins lower than the Group's average; increased
competition; and a highly promotional climate.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Group's lower gross profit margin has been partly offset by
improvements in selling, general and administrative expenses as a percent of
sales. The expense ratio was 19.2 percent of sales in fiscal 1996, 19.9 percent
in fiscal 1995 and 21.5 percent in fiscal 1994. The improvement in the expense
ratio primarily reflects total and comparable store sale growth achieved
throughout the three-year period, an ongoing focus on maximizing store
productivity and productivity of corporate overhead expenditures and a net
contribution from the credit card bank subsidiary.
Operating profits generated by the credit card bank operation are recorded
as a reduction to SG&A expenses. Throughout the three-year period, the bank
operation has benefited from a generally low interest rate environment, which
lowers the bank's cost of funds.
INTEREST EXPENSE
Interest expense increased to 0.3 percent of sales in fiscal 1996, from 0.2
percent in fiscal 1995 and 0.1 percent in fiscal 1994. Interest expense is
incurred on allocated debt used for store expansion and inventory and
receivables growth.
INCOME TAXES
The Group's effective income tax rate was 37.6 percent in both fiscal 1996
and fiscal 1995 and 36.7 in fiscal 1994. An increase in the federal statutory
income tax rate in fiscal 1994 required a revaluation of the deferred tax asset.
That revaluation had a favorable impact on the fiscal 1994 provision for income
taxes and resulted in the lower effective tax rate for that fiscal year. The
higher federal statutory income tax rate increased the effective tax rate for
the latter half of fiscal 1994 and throughout fiscal years 1995 and 1996.
VI-7
<PAGE>
EARNINGS BEFORE INTER-GROUP INTEREST IN THE CARMAX GROUP
Earnings rose 7 percent to $184.6 million in fiscal 1996. In fiscal 1995,
net earnings were $172.0 million, a 28 percent increase from $134.2 million in
fiscal 1994.
RETURN ON SALES
Return on sales before Inter-Group Interest in the CarMax Group was 2.8
percent in fiscal 1996 compared with 3.1 percent in fiscal 1995 and 3.3 percent
in fiscal 1994.
OPERATIONS OUTLOOK
Looking forward, management believes that continued investment in
Superstore expansion will maximize long-term shareholder value. Management
estimates that in fiscal 1997 the remaining markets suitable for Superstore
expansion will represent $37 billion of the consumer electronics, home office,
major appliance and music software industry's total retail sales potential of
$95 billion. By the year 2000, the Group expects to expand the Superstore base
into most of these markets. In fiscal 1997, the Group expects to open an
estimated 60 to 65 Superstores, including approximately 20 "D" stores, 32 "C"
stores, 10 "B" stores and three "A" stores. Approximately 35 of the new
Superstores will open in new markets. The Group also plans to replace
approximately 15 to 20 "B" and "C" stores with larger format stores and to open
additional Circuit City Express stores.
Although the Group expects lower pre-tax and net profit margins in fiscal
1997, management believes that the Group's financial performance and market
research indicate that the Group is well-positioned competitively and
financially to produce strong long-term returns and that its expansion plans
will further increase long-term earnings potential.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1996, net cash used in operating activities was $71.5 million
compared with $115.0 million provided by operating activities in fiscal 1995 and
$128.3 million provided by operating activities in fiscal 1994. The fiscal 1996
decrease principally reflects the limited earnings growth and lower increases in
the provision for deferred income taxes and in accounts payable, accrued
expenses, other current liabilities and accrued income taxes. In fiscal 1995 an
increase in merchandise inventory to support sales growth and store expansion
was offset by an increase in the provision for deferred income taxes.
Cash used in operating activities was $22.1 million for the six-month
period ended August 31, 1996. This was due primarily to limited earnings growth
and an $88.3 million increase in net accounts receivable. The growth in net
accounts receivable should slow in the third quarter as additional receivables
are securitized.
The Group funds capital expenditures with a combination of sales of real
property through sale-leaseback transactions and landlord reimbursements, and
from allocated short- and long-term debt. Capital expenditures of $491.4 million
in fiscal 1996 principally reflect Superstores opened during the year and a
portion of the Superstores opening in fiscal 1997. The sale-leaseback and
landlord reimbursement transactions completed in fiscal 1996 of $225.7 million
are largely related to real estate purchased in fiscal years 1996 and 1995.
Capital expenditures of $342.4 million in fiscal 1995 and $245.0 million in
fiscal 1994 largely were incurred in connection with the Superstore expansion
program.
Capital expenditures during the six-month period ended August 31, 1996,
totaled $201.4 million of which $122.3 million of the acquired assets were
disposed of through sale-leaseback transactions or landlord reimbursements.
The Group's credit card bank operation primarily funds its credit card
programs through securitization transactions, which allow the sale of
receivables while retaining a small interest in the receivables. The credit card
bank operation has a master trust securitization facility for its private-label
credit card that allows the transfer of up to $1.06 billion in receivables
through both private placement and the public market. At February 29, 1996, a
second securitization program allowed for the transfer of up to $850 million
($1.2 billion at August 31, 1996) in receivables related to the bankcard
programs. The Group expects that all securitization programs can be expanded to
accommodate future receivables growth.
The Group relies on the Company's external debt attributable to the Group
to fund operating deficits and to provide working capital needed to fund net
assets not otherwise disposed of through sale-leasebacks or receivables
securitizations. All significant financial activities of the Group are managed
by the Company on a centralized basis and are dependent on the
VI-8
<PAGE>
financial condition of the Company. Such financial activities include the
investment of surplus cash, issuance and repayment of debt, securitization of
receivables and sale leasebacks of real estate.
RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF FISCAL 1997 VERSUS FIRST SIX MONTHS
OF FISCAL 1996
SALES GROWTH
For the first six months of fiscal 1997, total sales increased 9 percent to
$3.13 billion from $2.86 billion in the same period last year. The growth
reflects the additional sales from new stores, partly offset by a comparable
store sales decline of 6 percent. The lower comparable store sales reflect
strong prior year comparisons, weak industry sales and an intense promotional
climate.
Gross dollar sales from all extended warranty programs were 6.3 percent of
sales in the first six months of fiscal 1997 compared with 6.0 percent in the
first six months of fiscal 1996. Third-party warranty revenue rose to 3.6
percent of sales in this year's first half from 3.0 percent in the same period
last year. The total extended warranty revenue that is reported in total sales
was 5.5 percent of sales in this year's first half compared with 5.7 percent in
the first half of last year.
SEASONALITY
Like other retail businesses, the Group's sales are greater in the fourth
quarter of the fiscal year than in any of the first three quarters because of
holiday buying patterns. The net earnings of any interim quarter are seasonally
disproportionate to net sales since administrative and certain operating
expenses remain relatively constant during the year. Therefore, interim results
should not be relied upon as necessarily indicative of results for the entire
fiscal year.
GROSS PROFIT
Gross profit as a percentage of sales was 23.5 percent in the first six
months of fiscal 1997 compared with 23.6 percent in the first six months of
fiscal 1996. The lower margin reflects the weak industry sales and the resulting
intensity in the promotional climate, which was mostly offset by an improved
product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased as a percentage of
sales to 20.7 percent in the first six months of fiscal 1997 from 19.6 percent
in the first six months of fiscal 1996. This increase primarily reflects the
impact of lower comparable store sales and the less favorable productivity of
larger-square-footage stores. These factors were partly offset by the increased
contribution from the credit card bank subsidiary.
INTEREST EXPENSE
Interest expense was 0.3 percent of sales in the first six months of fiscal
1997 compared with 0.2 percent in the first six months of fiscal 1996.
INCOME TAXES
The effective income tax rate was 38.0 percent in the first six months of
fiscal 1997 versus 37.6 percent in the same period last year.
EARNINGS BEFORE INTER-GROUP INTEREST IN CARMAX GROUP
Earnings for the first six months of fiscal 1997 were $49.0 million versus
$68.0 million in the first half of fiscal 1996. The lower earnings reflect
declines in industry sales and the intense promotional climate.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and shall be
applied prospectively. The Group does not expect the standard to have a material
impact on financial position or results of operations.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains forward-looking statements
regarding the Circuit City Group. Factors that could cause actual results to
differ materially include, but are not limited to, those discussed in the
Company's 1996 Annual Report on Form 10-K. See "Cautionary Statement Regarding
Forward-Looking Statements" in the Proxy Statement.
VI-9
<PAGE>
CIRCUIT CITY GROUP
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------------------------------------------
1996 % 1995 % 1994 %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
NET SALES AND OPERATING REVENUES.......................... $6,753,266 100.0 $5,505,945 100.0 $4,114,239 100.0
Cost of sales, buying and warehousing..................... 5,142,009 76.1 4,125,800 74.9 3,010,557 73.2
---------- ----- ---------- ----- ---------- -----
GROSS PROFIT.............................................. 1,611,257 23.9 1,380,145 25.1 1,103,682 26.8
---------- ----- ---------- ----- ---------- -----
Selling, general and administrative expenses
(Notes 3 and 9)......................................... 1,293,990 19.2 1,095,578 19.9 887,016 21.5
Interest Expense (Notes 3 and 5).......................... 21,325 0.3 8,985 0.2 4,630 0.1
---------- ----- ---------- ----- ---------- -----
TOTAL EXPENSES............................................ 1,315,315 19.5 1,104,563 20.1 891,646 21.6
---------- ----- ---------- ----- ---------- -----
Earnings before income taxes and Inter-Group Interest in
the CarMax Group........................................ 295,942 4.4 275,582 5.0 212,036 5.2
Provision for income taxes (Notes 3 and 6)................ 111,332 1.6 103,600 1.9 77,839 1.9
---------- ----- ---------- ----- ---------- -----
Earnings before Inter-Group Interest in the
CarMax Group............................................ 184,610 2.8 171,982 3.1 134,197 3.3
Net loss related to Inter-Group Interest in the
CarMax Group (Note 2)................................... 5,235 0.1 4,107 0.1 1,797 0.1
---------- ----- ---------- ----- ---------- -----
NET EARNINGS.............................................. $ 179,375 2.7 $ 167,875 3.0 $ 132,400 3.2
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
</TABLE>
See accompanying notes to group financial statements.
VI-10
<PAGE>
CIRCUIT CITY GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
AT FEBRUARY 29 OR 28
------------------------
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 41,485 $ 44,803
Net accounts and notes receivable (Note 10)..................................................... 307,833 220,239
Merchandise inventory........................................................................... 1,261,511 989,305
Deferred income taxes (Note 6).................................................................. 29,272 26,395
Prepaid expenses and other current assets....................................................... 16,627 13,573
---------- ----------
TOTAL CURRENT ASSETS......................................................................... 1,656,728 1,294,315
Property and equipment, net (Notes 4 and 5)..................................................... 754,405 573,301
Deferred income taxes (Note 6).................................................................. -- 4,854
Other assets.................................................................................... 16,080 17,991
---------- ----------
TOTAL ASSETS................................................................................. $2,427,213 $1,890,461
---------- ----------
---------- ----------
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt (Notes 5 and 8).......................................... $ 1,436 $ 2,378
Accounts payable................................................................................ 592,089 570,102
Short-term debt (Note 5)........................................................................ 74,037 --
Accrued expenses and other current liabilities.................................................. 122,625 112,875
Accrued income taxes............................................................................ 9,375 13,533
---------- ----------
TOTAL CURRENT LIABILITIES.................................................................... 799,562 698,888
Long-term debt, excluding current installments (Notes 5 and 8).................................. 320,642 66,976
Deferred revenue and other liabilities.......................................................... 212,563 241,167
Inter-Group Interest in the CarMax Group (Note 2)............................................... 11,201 5,966
Deferred income taxes (Note 6).................................................................. 19,324 --
---------- ----------
TOTAL LIABILITIES............................................................................ 1,363,292 1,012,997
---------- ----------
GROUP EQUITY................................................................................. 1,063,921 877,464
---------- ----------
Commitments and contingent liabilities (Notes 1, 7, 8, 10, 11 and 13)
TOTAL LIABILITIES AND GROUP EQUITY........................................................... $2,427,213 $1,890,461
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to group financial statements.
VI-11
<PAGE>
CIRCUIT CITY GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings......................................................................... $ 179,375 $ 167,875 $ 132,400
Adjustments to reconcile net earnings to net cash (used in) provided by operating
activities:
Net loss related to Inter-Group Interest in the CarMax Group...................... 5,235 4,107 1,797
Depreciation and amortization..................................................... 78,991 66,607 54,952
Loss on sales of property and equipment........................................... 5,600 2,199 1,910
Provision for deferred income taxes............................................... 21,301 73,333 (16,995)
(Decrease) increase in deferred revenue and other liabilities..................... (28,604) (27,102) 36,215
Increase in net accounts and notes receivable..................................... (87,594) (41,574) (59,671)
Increase in merchandise inventory, prepaid expenses and other current assets...... (275,260) (281,394) (192,442)
Decrease (increase) in other assets............................................... 1,911 (3,819) (522)
Increase in accounts payable, accrued expenses and other current liabilities, and
accrued income taxes............................................................. 27,579 154,757 170,621
--------- --------- ---------
Net cash (used in) provided by operating activities.................................. (71,466) 114,989 128,265
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................. (491,399) (342,416) (244,972)
Proceeds from sales of property and equipment........................................ 225,704 137,181 122,029
--------- --------- ---------
Net cash used in investing activities................................................ (265,695) (205,235) (122,943)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net....................................... 74,037 -- --
Proceeds from issuance of (principal payments on) long-term debt, net................ 252,724 62,263 (75,573)
Equity issuances, net................................................................ 18,245 8,352 10,150
Dividends paid....................................................................... (11,163) (9,155) (7,674)
--------- --------- ---------
Net cash provided by (used in) financing activities.................................. 333,843 61,460 (73,097)
--------- --------- ---------
Decrease in cash and cash equivalents.................................................. (3,318) (28,786) (67,775)
Cash and cash equivalents at beginning of year......................................... 44,803 73,589 141,364
--------- --------- ---------
Cash and cash equivalents at end of year............................................... $ 41,485 $ 44,803 $ 73,589
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to group financial statements.
VI-12
<PAGE>
CIRCUIT CITY GROUP
STATEMENTS OF GROUP EQUITY
<TABLE>
<CAPTION>
GROUP EQUITY
------------
<S> <C>
(AMOUNTS IN THOUSANDS)
BALANCE AT MARCH 1, 1993....................................................................................... $ 575,516
------------
Net earnings................................................................................................. 132,400
Equity issuances, net........................................................................................ 10,150
Cash dividends............................................................................................... (7,674)
------------
BALANCE AT FEBRUARY 28, 1994................................................................................... 710,392
------------
Net earnings................................................................................................. 167,875
Equity issuances, net........................................................................................ 8,352
Cash dividends............................................................................................... (9,155)
------------
BALANCE AT FEBRUARY 28, 1995................................................................................... 877,464
------------
Net earnings................................................................................................. 179,375
Equity issuances, net........................................................................................ 18,245
Cash dividends............................................................................................... (11,163)
------------
BALANCE AT FEBRUARY 29, 1996................................................................................... $1,063,921
------------
------------
</TABLE>
See accompanying notes to group financial statements.
VI-13
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Board of Directors of Circuit City Stores, Inc. (the "Company") has
adopted a proposal (the "CarMax Stock Proposal") which, if approved by
shareholders and implemented by the Board of Directors, would effect a
comprehensive plan that will result in a restructuring of the existing Common
Stock of the Company into two new series of Common Stock intended to reflect
separately the performance of the Company's two main businesses -- the consumer
electronics and appliances retail business, including its interest in the CarMax
Group referred to below (the "Circuit City Group"), and the used- and new-car
retail business (the "CarMax Group"). Under the CarMax Stock Proposal, each
share of the Company's existing Common Stock would be redesignated as a share of
a new series of Common Stock to be called Circuit City Stores, Inc. -- Circuit
City Group Common Stock, par value $0.50 per share ("Circuit City Stock"), which
is intended to reflect separately the performance of the Circuit City Group,
which is generally comprised of (i) the Company's consumer electronics and
appliances retail business, (ii) an interest in the CarMax Group, which excludes
the interest represented by any outstanding shares of CarMax Stock, as described
below, and (iii) all other businesses in which the Company or any of its
subsidiaries may be engaged (other than those comprising the CarMax Group). In
addition, the Board of Directors would be authorized to designate and issue
shares of a new series of Common Stock to be called Circuit City Stores,
Inc. -- CarMax Group Common Stock, par value $0.50 per share ("CarMax Stock"),
which is intended to reflect separately the performance of the CarMax Group. The
accompanying group financial statements include the accounts of the Circuit City
Group. All significant intercompany balances and transactions have been
eliminated. The Circuit City Group and the CarMax Group are sometimes referred
to collectively as the "Groups" and individually as a "Group."
Following approval of the CarMax Stock Proposal, the Company currently
intends, subject to prevailing market and other conditions, to offer shares of
CarMax Stock initially representing 15 percent to 20 percent of the equity value
of the CarMax Group to the public for cash in a public offering (the
"Offering"). The Company intends to allocate the proceeds of the Offering to the
CarMax Group. Upon completion of the Offering, the Circuit City Group will hold
an interest (the "Inter-Group Interest") in 80 percent to 85 percent of the
equity value of the CarMax Group.
The Circuit City Group and the CarMax Group financial statements comprise
all of the accounts included in the corresponding consolidated financial
statements of the Company. The separate Group financial statements give effect
to the management and allocation policies adopted by the Board of Directors, as
described under "Corporate Activities" below. The Circuit City Group financial
statements have been prepared on a basis that management believes to be
reasonable and appropriate and include (i) the historical financial position,
results of operations and cash flows of the Circuit City Group, (ii) an
allocated portion of the Company's debt, including the related effects upon
results of operations and cash flows, (iii) an allocated portion of the
Company's corporate general and administrative costs and (iv) the Inter-Group
Interest held by the Circuit City Group in the CarMax Group.
If the CarMax Stock Proposal is approved and implemented, the Company will
provide to holders of both Circuit City Stock and CarMax Stock separate
financial statements, management's discussion and analysis of results of
operations and financial condition, description of business and other relevant
information for the Circuit City Group, the CarMax Group and the Company.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the Circuit
City Group and the CarMax Group for the purposes of preparing their respective
financial statements, holders of Circuit City Stock and holders of CarMax Stock
will be shareholders of the Company and will continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company contemplated by the CarMax Stock Proposal will
not affect title to the assets or responsibility for the liabilities of the
Company or any of its subsidiaries. As a result, the CarMax Stock Proposal will
not affect the rights of holders of the Company's or any of its subsidiaries'
debt. The results of operations or financial condition of either Group could
affect the results of operations or financial condition of the other Group and
the market price of the series of Common Stock relating to that Group. In
addition, any net losses of the Circuit City Group or the CarMax Group and
dividends or distributions on, or repurchases of, Circuit City Stock or CarMax
Stock will reduce the assets of the Company legally available for payment of
dividends on both the Circuit City Stock and the CarMax Stock. Accordingly, the
Circuit City Group's financial information should be read in conjunction with
the Company's consolidated financial information and the CarMax Group's
financial information.
The management and allocation policies applicable to the preparation of the
financial statements of the Circuit City Group and the CarMax Group may be
modified or rescinded, or additional policies may be adopted, at the sole
discretion of
VI-14
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
1. BASIS OF PRESENTATION -- Continued
the Board of Directors without approval of the shareholders, although the Board
of Directors has no present plans to do so. Any determination of the Board of
Directors to modify or rescind such policies, or to adopt additional policies,
including any such decision that would have disparate effects upon holders of
Circuit City Stock and holders of CarMax Stock, would be made by the Board of
Directors in its good faith business judgment of the Company's best interests,
taking into consideration the interests of all common shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH AND CASH EQUIVALENTS
Cash equivalents of $10,113,000 and $18,719,000 at February 29, 1996, and
February 28, 1995, respectively, consist of highly liquid debt securities with
original maturities of three months or less.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company enters into financial instruments on behalf of the Circuit City
Group. The carrying value of the Circuit City Group's financial instruments,
excluding interest rate swap agreements ("swaps"), approximates fair value due
to variable interest rates on long-term debt and the short-term maturities of
the assets and other liabilities. Credit risk is the exposure created by the
potential nonperformance of another material party to an agreement due to
changes in economic, industry or geographic factors. Credit risk is mitigated by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Circuit City Group does not anticipate loss
for nonperformance. All financial instruments are diversified along industry,
product and geographic areas. As discussed in Note 11, swaps are not held for
trading purposes and, therefore, are not carried at fair value.
(C) MERCHANDISE INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined by
the average cost method.
(D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the assets' estimated useful lives, which range from
three to 25 years.
Property held under capital leases is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(E) PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are deferred and
amortized ratably over the period from the date of the store opening to the end
of the fiscal year.
(F) INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred
income taxes reflect the impact of temporary differences between the amounts of
assets and liabilities recognized for financial reporting purposes and the
amounts recognized for income tax purposes, measured by applying currently
enacted tax laws. A deferred tax asset is recognized if it is more likely than
not that a benefit will be realized.
VI-15
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(G) DEFERRED REVENUE
The Circuit City Group sells its own extended warranty contracts and
extended warranty contracts on behalf of unrelated third parties. The contracts
extend beyond the normal manufacturer's warranty period, usually with terms of
coverage (including the manufacturer's warranty period) between 12 and 60
months.
All revenue from the sale of the Circuit City Group's own extended warranty
contracts is deferred and amortized on a straight-line basis over the life of
the contracts. Incremental direct contract costs related to the sale of
contracts are deferred and charged to expense in proportion to the revenue
recognized. All other costs are charged to expense as incurred. Commission
revenue for the unrelated third-party extended warranty plans is recognized at
the time of sale.
(H) INTER-GROUP INTEREST
Under the CarMax Stock Proposal, prior to the Offering or any other
issuance of CarMax Stock, the Circuit City Group would have a 100 percent
Inter-Group Interest in the CarMax Group. Following completion of such Offering,
it is currently anticipated that the Circuit City Group would have an 80 percent
to 85 percent Inter-Group Interest in the CarMax Group. For purposes of these
group financial statements, the Circuit City Group's Inter-Group Interest in the
equity value of the Company attributable to the CarMax Group has been reflected
as "Inter-Group Interest in the CarMax Group" in the Circuit City Group balance
sheets. Similarly, the net losses of the CarMax Group attributable to the
Circuit City Group's Inter-Group Interest are reflected as "Net loss related to
Inter-Group Interest in the CarMax Group" in the Circuit City Group statements
of earnings. Accordingly, all amounts corresponding to the Circuit City Group's
Inter-Group Interest in the CarMax Group in these group financial statements
represent the Circuit City Group's proportional interest in the businesses,
assets and liabilities and income and expenses of the CarMax Group.
The carrying value of the Circuit City Group's Inter-Group Interest in the
CarMax Group would be increased proportionally for net income (or decreased for
net loss) of the CarMax Group. In addition, in the event of any dividend or
other distribution on CarMax Stock, an amount that is proportionate to the
aggregate amount so paid in respect to shares of CarMax Stock would be
transferred to the Circuit City Group from the CarMax Group with respect to its
Inter-Group Interest and would reduce the related book value. In addition to the
effect of the Offering, the fractional amount of the Circuit City Group's
Inter-Group Interest in the CarMax Group would be increased or decreased in
certain other circumstances described in the proposed amendment to the Company's
Amended and Restated Articles of Incorporation.
(I) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating profits generated by the credit card bank subsidiary are recorded
as a reduction to selling, general and administrative expenses.
(J) ADVERTISING EXPENSES
All advertising costs are expensed as incurred.
(K) EARNINGS PER SHARE
Historical earnings per share is omitted from the statements of earnings
since the Circuit City Stock was not part of the capital structure of the
Company for the periods presented. Following implementation of the CarMax Stock
Proposal, the method of calculating earnings per share for the Circuit City
Group would reflect the terms of the proposed amendments to the Company's
Amended and Restated Articles of Incorporation and would be computed by dividing
earnings or losses of the Circuit City Group, including the Circuit City Group's
interest in the earnings or losses of the CarMax Group, by the weighted average
number of shares of Circuit City Stock and dilutive Circuit City Stock
equivalents outstanding during the applicable period.
(L) RISKS AND UNCERTAINTIES
The Circuit City Group is the nation's largest retailer of brand-name
consumer electronics and major appliances and a leading retailer of personal
computers and music software. The diversity of the Circuit City Group's
products, customers, suppliers and geographic operations significantly reduces
the risk that a severe impact will occur in the near term as a result
VI-16
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
of changes in its customer base, competition, sources of supply or markets. It
is unlikely that any one event would have a severe impact on the Circuit City
Group's operating results.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(M) RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
classifications adopted in fiscal 1996.
3. CORPORATE ACTIVITIES
The Circuit City Group's financial statements reflect the application of
the management and allocation policies adopted by the Board of Directors to
various corporate activities, as described below.
(A) FINANCIAL ACTIVITIES
Most financial activities are managed by the Company on a centralized
basis. Such financial activities include the investment of surplus cash and the
issuance and repayment of short-term and long-term debt.
(B) DEBT AND INTEREST EXPENSE
Allocated debt of the Circuit City Group consists of (i) Company debt, if
any, that has been allocated in its entirety to the Circuit City Group and (ii)
a portion of the Company's debt that is allocated between the Circuit City Group
and the CarMax Group ("pooled debt"). The pooled debt bears interest at a rate
based on the weighted average interest rate of such debt calculated on a
periodic basis and applied to the average pooled debt balance. Expenses related
to increases in pooled debt are reflected in the weighted average interest rate
of such pooled debt as a whole.
(C) CORPORATE GENERAL AND ADMINISTRATIVE COSTS
Corporate general and administrative costs and other shared services
generally have been allocated to the Circuit City Group based upon utilization
of such services by the Circuit City Group. Where determinations based on
utilization alone have been impracticable, other methods and criteria were used
that management believes are equitable and provide a reasonable estimate of the
cost attributable to the Circuit City Group.
(D) INCOME TAXES
The Circuit City Group is included in the consolidated federal income tax
return filed by the Company. Accordingly, the provision for federal income taxes
and related payments of tax are determined on a consolidated basis. The
financial statement provision and the related tax payments or refunds are
reflected in the Circuit City Group's and the CarMax Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Circuit City Group
and the CarMax Group based principally upon the financial income, taxable
income, credits and other amounts directly related to the respective Group. Tax
benefits that cannot be used by the Group generating such attributes, but can be
utilized on a consolidated basis, are allocated to the Group that generated such
benefits. As a result, the allocated group amounts of taxes payable or
refundable are not necessarily comparable to those that would have resulted if
the Groups had filed separate tax returns.
VI-17
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Land and buildings (20 to 25 years)........................... $ 85,263 $ 83,109
Construction in progress...................................... 188,790 105,332
Furniture, fixtures and equipment (3 to 8 years).............. 384,330 342,750
Leasehold improvements (10 to 15 years)....................... 350,696 285,928
Capital leases, primarily buildings (20 years)................ 13,140 13,679
---------- ----------
1,022,219 830,798
Less accumulated depreciation and amortization................ 267,814 257,497
---------- ----------
Property and equipment, net................................... $ 754,405 $ 573,301
---------- ----------
---------- ----------
</TABLE>
5. DEBT
Long-term debt of the Company at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Term loans........................................................ $275,000 $100,000
Short-term debt expected to be refinanced......................... 100,000 53,000
Industrial Development Revenue Bonds due through 2006 at various
prime-based rates of interest ranging from 5.4% to 6.7%......... 12,393 14,698
Obligations under capital leases.................................. 13,204 13,285
-------- --------
Total long-term debt.............................................. 400,597 180,983
Less current installments......................................... 1,436 2,378
-------- --------
Long-term debt, excluding current installments.................... $399,161 $178,605
-------- --------
-------- --------
Portion of long-term debt allocated to Circuit City Group......... $322,078 $ 69,354
-------- --------
-------- --------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. Principal is due in full at maturity with interest
payable periodically at LIBOR plus 0.50 percent. At February 29, 1996, the
interest rate on the term loan was 5.88 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 1996, the interest rate
on the term loan was 5.65 percent.
The Company has the intent and ability to refinance the $100,000,000 of
short-term committed and uncommitted bank borrowings on a long-term basis by
entering into a multi-year term loan with a group of banks. Consequently, the
Company has classified the short-term debt as long-term for financial reporting
purposes. The existing revolving credit agreement could be used for this
purpose, although the Company does not currently intend to do so.
The Company maintains a multi-year, $100,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on
certain money market rates and a commitment fee of 0.13 percent per annum. The
agreement was entered into as of June 30, 1992, was amended and restated as of
June 30, 1995, and terminates June 30, 2000. The agreement provides for annual
one-year extensions of the final maturity beginning on or before June 30, 1996,
and each June 30 thereafter. No amounts were outstanding under the revolving
credit agreement at February 29, 1996, or February 28, 1995.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$13,073,000 at February 29, 1996, and $15,400,000 at February 28, 1995.
VI-18
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
5. DEBT -- 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 29, 1996, and February 28, 1995.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Average short-term debt outstanding.............................. $185,789 $134,022 $ 77,392
-------- -------- --------
-------- -------- --------
Maximum short-term debt outstanding.............................. $479,000 $465,000 $355,000
-------- -------- --------
-------- -------- --------
Aggregate committed lines of credit.............................. $255,000 $285,000 $145,000
-------- -------- --------
-------- -------- --------
</TABLE>
Short-term debt allocated to the Circuit City Group at February 29, 1996,
was $74,037,000.
The weighted average interest rate on the outstanding short-term debt was
5.9 percent during fiscal 1996, 5.3 percent during fiscal 1995 and 3.3 percent
during fiscal 1994.
Interest expense allocated by the Company to the Circuit City Group,
excluding interest capitalized, was $21,325,263, $8,984,907 and $4,629,528 in
fiscal 1996, 1995, and 1994, respectively.
The Circuit City Group capitalizes interest in connection with the
construction of certain facilities. In fiscal 1996, interest capitalized
amounted to $5,466,000 ($3,670,000 and $2,507,000 in fiscal 1995 and 1994,
respectively).
Concurrent with the funding of the $175,000,000 term loan facility in May
1995, the Company entered into five-year swaps with notional amounts aggregating
$175,000,000. These swaps effectively converted the variable-rate obligation
into a fixed-rate obligation. The fair value of the swaps is the amount at which
they could be settled. This value is based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, would result
in a loss of $2,500,000.
6. INCOME TAXES
The components of the provision for income taxes on earnings before income
taxes and Inter-Group Interest in the CarMax Group follow:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Current:
Federal......................................................... $ 84,348 $ 23,786 $ 86,021
State........................................................... 5,683 6,481 8,813
-------- -------- --------
90,031 30,267 94,834
-------- -------- --------
Deferred:
Federal......................................................... 18,047 68,719 (14,159)
State........................................................... 3,254 4,614 (2,836)
-------- -------- --------
21,301 73,333 (16,995)
-------- -------- --------
Provision for income taxes........................................ $111,332 $103,600 $ 77,839
-------- -------- --------
-------- -------- --------
</TABLE>
VI-19
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
6. INCOME TAXES -- Continued
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate............................ 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit......... 2.6 2.6 1.8
Other, net................................................... -- -- (0.1)
------ ------ ------
Effective income tax rate.................................... 37.6% 37.6% 36.7%
------ ------ ------
------ ------ ------
</TABLE>
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 29, 1996, and February 28, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue........................................................ $22,655 $31,059
Inventory capitalization................................................ 5,691 6,924
Accrued expenses........................................................ 34,190 31,729
Other................................................................... 3,090 4,929
------- -------
Total gross deferred tax assets...................................... 65,626 74,641
------- -------
Deferred Tax Liabilities:
Depreciation and amortization........................................... 39,448 30,342
Prepaid benefit programs................................................ 886 2,892
Other prepaid expenses.................................................. 9,011 5,090
Other................................................................... 6,333 5,068
------- -------
Total gross deferred tax liabilities................................. 55,678 43,392
------- -------
Net deferred tax asset.................................................... $ 9,948 $31,249
------- -------
------- -------
</TABLE>
Of the gross deferred tax assets at February 29, 1996, and February 28,
1995, approximately $59.1 million and $64.7 million, respectively, can be
realized by carrybacks or offsetting of deferred tax liabilities. Based on the
Circuit City Group's historical and current pre-tax earnings, management
believes the remaining amount will be realized through future taxable income;
therefore, no valuation allowance is necessary.
7. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of this program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of the
Company's common stock at February 29, 1996, and February 28, 1995.
Eligible employees of the Circuit City Group participate in the Company's
plan. Pension costs for these employees have been allocated to the Circuit City
Group based on its proportionate share of the projected benefit obligation.
The components of net pension expense for the Circuit City Group are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR
28
----------------------------
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Service cost of benefits earned during the year........................ $5,756 $ 4,451 $ 3,916
Interest cost on projected benefit obligation.......................... 3,606 2,710 2,351
Actual return on plan assets........................................... (9,149) (101) (3,632)
Net amortization....................................................... 6,227 (3,434) 1,212
------ ------- -------
Net pension expense.................................................... $6,440 $ 3,626 $ 3,847
------ ------- -------
------ ------- -------
</TABLE>
VI-20
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
7. PENSION PLAN -- Continued
The following table sets forth the Circuit City Group's share of the plan's
financial status and amounts recognized in the group balance sheets as of
February 29 or 28:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested.................................................................. $39,263 $25,938
Non-vested.............................................................. 5,104 3,713
------- -------
Total benefits............................................................ 44,367 29,651
Additional amounts related to projected salary increases.................. 22,532 15,869
------- -------
Projected benefit obligation for services rendered to date................ 66,899 45,520
Plan assets at fair value................................................. (46,444) (36,852)
------- -------
Projected benefit obligation in excess of plan assets..................... 20,455 8,668
Unrecognized loss from past experience.................................... (13,922) (8,059)
Unrecognized prior service cost........................................... 863 976
Unrecognized net obligation being recognized over 15 years................ 1,195 1,407
------- -------
Accrued pension cost...................................................... $ 8,591 $ 2,992
------- -------
------- -------
</TABLE>
Assumptions used in the accounting for the pension plan were:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29
OR 28
-------------------------
1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Weighted average discount rate.......................................... 7.0% 8.0% 7.5%
Rate of increase in compensation levels................................. 6.0% 6.5% 6.0%
Rate of return on plan assets........................................... 9.0% 8.0% 9.0%
----- ------ ------
</TABLE>
8. LEASE COMMITMENTS
The Circuit City Group conducts a substantial portion of its business in
leased premises. The Circuit City Group's lease obligations are based upon
contractual minimum rates. For certain locations, amounts in excess of these
minimum rates are payable based upon specified percentages of sales. Rental
expense and sublease income for all operating leases are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Minimum rentals.................................................... $144,232 $117,012 $95,921
Rentals based on sales volume...................................... 2,871 2,513 1,910
Sublease income.................................................... (9,996) (8,875) (8,441)
-------- -------- -------
Net................................................................ $137,107 $110,650 $89,390
-------- -------- -------
-------- -------- -------
</TABLE>
The Circuit City Group computes rent based on a percentage of sales volumes
in excess of defined amounts in certain store locations. Most of the Circuit
City Group's other leases are fixed dollar rental commitments, many with rent
escalations based on the Consumer Price Index. Most provide that the Circuit
City Group pay taxes, maintenance, insurance and certain other operating
expenses applicable to the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 25 years at terms substantially the same as the initial
terms.
VI-21
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
8. LEASE COMMITMENTS -- Continued
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Circuit City Group, as of February 29, 1996,
were:
<TABLE>
<CAPTION>
OPERATING OPERATING
CAPITAL LEASES SUBLEASE
FISCAL LEASES COMMITMENTS INCOME
- ---------------------------------------------------------------- ------- ----------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
1997............................................................ $ 1,541 $ 158,713 $(10,618)
1998............................................................ 1,541 159,141 (9,316)
1999............................................................ 1,579 156,677 (7,759)
2000............................................................ 1,662 154,631 (6,980)
2001............................................................ 1,681 153,448 (5,987)
After 2001...................................................... 21,683 1,720,973 (35,165)
------- ----------- --------
Total minimum lease payments.................................... 29,687 $2,503,583 $(75,825)
----------- --------
----------- --------
Less amounts representing interest.............................. 16,483
-------
Present value of net minimum capital lease payments............. $13,204
-------
-------
</TABLE>
In fiscal 1996, the Company entered into sale-leaseback transactions on
behalf of the Circuit City Group with unrelated parties at an aggregate selling
price of $158,150,000 ($71,670,000 in fiscal 1995 and $81,980,000 in fiscal
1994). Neither the Company nor the Circuit City Group has continuing involvement
under the sale-leaseback transactions.
9. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying group statements of earnings,
amounted to $317,181,000, $260,767,000 and $210,319,000 (4.7 percent, 4.7
percent and 5.1 percent of net sales and operating revenues) in fiscal years
1996, 1995 and 1994, respectively.
10. SECURITIZATIONS
The Company enters into securitization transactions on behalf of the
Circuit City Group, which allow for the sale of credit card receivables to
unrelated entities, to finance the consumer revolving credit receivables
generated by First North American National Bank (FNANB), a wholly-owned credit
card bank subsidiary of the Company. No gain or loss has been recorded on these
sales. Proceeds from securitization transactions were $692.3 million, $428.4
million and $214.6 million for fiscal 1996, 1995 and 1994, respectively. At
February 29 or 28, the following amounts were outstanding:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables................................................... $1,860,459 $1,181,954
Interest retained by Circuit City Group................................... (110,459) (124,206)
---------- ----------
Net receivables transferred............................................... $1,750,000 $1,057,748
---------- ----------
---------- ----------
Net receivables transferred with recourse................................. $ 760,000 $1,057,748
---------- ----------
---------- ----------
Program capacity.......................................................... $1,910,000 $1,060,000
---------- ----------
---------- ----------
</TABLE>
FNANB finances its private-label credit card program through a single
master trust, through both private placement and the public market. During
fiscal 1996, FNANB placed an additional $300 million in the public market for a
total program capacity of $1,060 million. The master trust vehicle permits
further expansion of the securitization programs to meet future receivables
growth. The recourse provisions under the private-label securitization programs
were eliminated during fiscal 1996.
In addition, FNANB has an asset securitization program in place for its
bankcard receivables that allows the transfer of up to $850 million in
receivables as of February 29, 1996. The bankcard securitization agreements
provide recourse to the
VI-22
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
10. SECURITIZATIONS -- Continued
Circuit City Group for any cash flow deficiencies if the monthly credit card
cash flows from finance charges are inadequate to cover such expenses. The
Circuit City Group believes that as of February 29, 1996, no liability existed
under these recourse provisions. The finance charges from the transferred
receivables are used to fund interest costs, charge-offs, servicing fees and
other related costs. FNANB's servicing revenue totaled $142.9 million, $77.8
million and $54.5 million for fiscal 1996, 1995 and 1994, respectively.
11. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year swaps on behalf of the
Circuit City Group with notional amounts totaling $300 million relating to the
public issuance of securities by the master trust. As part of this issuance,
$344 million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. FNANB is servicer for the accounts, and as such, receives
its monthly cash portfolio yield after deducting interest, charge-offs and other
related costs. The underlying receivables are based on a floating rate. The
swaps were put in place to better match funding costs to the receivables being
securitized. As a result, the master trust pays fixed-rate interest while the
Company utilizes the swaps to convert the fixed-rate obligation to a
floating-rate, LIBOR-based obligation. The fair value of the swaps is the amount
at which they could be settled based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, and February
28, 1995, would result in gains of $19.4 million and $6.3 million, respectively.
The market and credit risks associated with these swaps are similar to
those relating to other types of financial instruments. Market risk is the
exposure created by potential fluctuations in interest rates and is directly
related to the product type, agreement terms and transaction volume. The Circuit
City Group does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure created by potential nonperformance of another party to an
agreement. Credit risk is mitigated by dealing with highly rated counterparties.
12. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) RESTRICTED STOCK
The Company has issued restricted stock under the provisions of the 1994
and 1988 Stock Incentive Plans whereby key employees are granted restricted
shares of the Company's common stock. Shares are awarded in the name of the
employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire three
years from the date of grant. In fiscal 1996, restricted stock awards for
258,775 shares were granted to eligible employees. The market value of these
shares has been recorded as unearned compensation and is a component of
stockholder's equity. Unearned compensation is expensed over the restriction
periods. In fiscal 1996, a total of $3,362,500 was charged to Circuit City Group
operations ($2,552,500 in 1995 and $2,955,400 in 1994). As of February 29, 1996,
499,279 restricted shares were outstanding.
(B) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan for all employees meeting
certain eligibility criteria. Under the Plan, eligible employees may purchase
shares of the Company's common stock, subject to certain limitations, at 85
percent of its market value. Purchases are limited to 10 percent of an
employee's eligible compensation, up to a maximum of $7,500 per year. At
February 29, 1996, a total of 62,406 shares remained available under the Plan.
During fiscal 1996, 474,889 shares were issued to or purchased on the open
market for employees (537,467 and 436,400 is fiscal 1995 and 1994,
respectively). The average price per share was $29.97, $22.23 and $26.20 in
fiscal 1996, 1995 and 1994, respectively. The purchase price discount is charged
to Circuit City Group operations and totaled $2,030,000, $1,760,200 and
$1,653,700 in fiscal 1996, 1995 and 1994, respectively.
VI-23
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
13. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the Circuit City Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Circuit City
Group's financial position, liquidity or results of operations.
VI-24
<PAGE>
CIRCUIT CITY GROUP
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CIRCUIT CITY STORES, INC.:
We have audited the accompanying balance sheets of the Circuit City Group
(as defined in Note 1) as of February 29, 1996 and February 28, 1995 and the
related statements of earnings, group equity and cash flows for each of the
fiscal years in the three-year period ended February 29, 1996. These financial
statements are the responsibility of Circuit City Stores, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Circuit City Group as of
February 29, 1996 and February 28, 1995 and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
February 29, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- ----------------------------
Richmond, Virginia
October 25, 1996
VI-25
<PAGE>
CIRCUIT CITY GROUP
STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
--------------------------------------------
<S> <C> <C> <C> <C>
1996 % 1995 %
----------- ----- ----------- -----
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
NET SALES AND OPERATING REVENUES.............................................. $ 3,125,399 100.0 $ 2,864,829 100.0
Cost of sales, buying and warehousing......................................... 2,389,867 76.5 2,188,062 76.4
----------- ----- ----------- -----
GROSS PROFIT.................................................................. 735,532 23.5 676,767 23.6
----------- ----- ----------- -----
Selling, general and administrative expenses.................................. 647,552 20.7 561,725 19.6
Interest expense.............................................................. 8,951 0.3 6,105 0.2
----------- ----- ----------- -----
TOTAL EXPENSES................................................................ 656,503 21.0 567,830 19.8
----------- ----- ----------- -----
Earnings before income taxes and Inter-Group Interest in the CarMax Group..... 79,029 2.5 108,937 3.8
Provision for income taxes.................................................... 30,053 0.9 40,964 1.4
----------- ----- ----------- -----
Earnings before Inter-Group Interest in the CarMax Group...................... 48,976 1.6 67,973 2.4
Net loss related to Inter-Group Interest in the CarMax Group.................. 610 0.0 2,109 0.1
----------- ----- ----------- -----
NET EARNINGS.................................................................. $ 48,366 1.6 $ 65,864 2.3
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
See accompanying notes to group financial statements.
VI-26
<PAGE>
CIRCUIT CITY GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
AUG. 31, 1996 FEB. 29, 1996
------------- -------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................................... $ 28,368 $ 41,485
Net accounts and notes receivable.............................................................. 396,121 307,833
Merchandise inventory.......................................................................... 1,330,047 1,261,511
Deferred income taxes.......................................................................... 14,842 29,272
Prepaid expenses and other current assets...................................................... 27,096 16,627
------------- -------------
TOTAL CURRENT ASSETS........................................................................ 1,796,474 1,656,728
Property and equipment, net.................................................................... 787,580 754,405
Other assets................................................................................... 16,196 16,080
------------- -------------
TOTAL ASSETS................................................................................ $ 2,600,250 $ 2,427,213
------------- -------------
------------- -------------
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt......................................................... $ 1,462 $ 1,436
Accounts payable............................................................................... 698,235 592,089
Short-term debt................................................................................ 139,507 74,037
Accrued expenses and other current liabilities................................................. 89,965 122,625
Accrued income taxes........................................................................... -- 9,375
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 929,169 799,562
Long-term debt, excluding current installments................................................... 341,191 320,642
Deferred revenue and other liabilities........................................................... 181,996 212,563
Inter-Group Interest in the CarMax Group......................................................... 11,811 11,201
Deferred income taxes............................................................................ 21,874 19,324
------------- -------------
TOTAL LIABILITIES........................................................................... 1,486,041 1,363,292
------------- -------------
GROUP EQUITY..................................................................................... 1,114,209 1,063,921
------------- -------------
Commitments and contingent liabilities
TOTAL LIABILITIES AND GROUP EQUITY.......................................................... $ 2,600,250 $ 2,427,213
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to group financial statements.
VI-27
<PAGE>
CIRCUIT CITY GROUP
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUG. 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings.................................................................................. $ 48,366 $ 65,864
Adjustments to reconcile net earnings to net cash used in operating activities:
Net loss related to Inter-Group Interest in the CarMax Group............................... 610 2,109
Depreciation and amortization.............................................................. 47,940 37,920
(Gain) loss on sales of property and equipment............................................. (2,088) 2,732
Provision for deferred income taxes........................................................ 16,980 8,288
Decrease in deferred revenue and other liabilities......................................... (30,567) (31,386)
Increase in net accounts and notes receivable.............................................. (88,288) (184,885)
Increase in merchandise inventory, prepaid expenses and other current assets............... (79,005) (258,517)
Increase in other assets................................................................... (116) (3,136)
Increase in accounts payable, accrued expenses and other current liabilities, and accrued
income taxes............................................................................... 64,111 101,162
------------- -------------
Net cash used in operating activities......................................................... (22,057) (259,849)
------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment........................................................... (201,361) (228,512)
Proceeds from sales of property and equipment................................................. 122,334 65,984
------------- -------------
Net cash used in investing activities......................................................... (79,027) (162,528)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net................................................ 65,470 226,054
Proceeds from issuance of long-term debt, net................................................. 20,575 193,220
Equity issuances, net......................................................................... 8,266 7,392
Dividends paid................................................................................ (6,344) (5,329)
------------- -------------
Net cash provided by financing activities..................................................... 87,967 421,337
------------- -------------
Decrease in cash and cash equivalents........................................................... (13,117) (1,040)
Cash and cash equivalents at beginning of year.................................................. 41,485 44,803
------------- -------------
Cash and cash equivalents at end of period...................................................... $ 28,368 $ 43,763
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to group financial statements.
VI-28
<PAGE>
CIRCUIT CITY GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The group financial statements of the Circuit City Group conform to
generally accepted accounting principles. The interim period group financial
statements are unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim group financial statements have been included. The
fiscal year-end balance sheet data were derived from audited group financial
statements. The group financial statements included herein should be read in
conjunction with the notes included in the Circuit City Group's 1996 annual
financial statements.
2. DEBT
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150 million
unsecured revolving credit agreement with a group of banks. This facility
replaced a similar $100 million facility.
3. INTEREST RATE SWAPS
Recording the Circuit City Group's interest rate swaps at fair value at
August 31, 1996, would result in a gain of approximately $12.6 million compared
to a gain of $19.4 million at February 29, 1996. The notional amount of the
swaps was approximately $300 million at August 31, 1996, and February 29, 1996.
VI-29
<PAGE>
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<PAGE>
ANNEX VII
DESCRIPTION OF BUSINESS OF CARMAX GROUP
OVERVIEW
The CarMax Group ("CarMax") is a leading retailer of used cars and light
trucks in the United States with six stores located in the Southeast and one
vehicle reconditioning center in Orlando, Florida. CarMax purchases,
reconditions and sells used vehicles at each of its stores and sells new
vehicles at one of its Atlanta, Georgia locations under a franchise agreement
with Chrysler Corporation ("Chrysler"). CarMax provides its customers with a
full range of related services, including the financing of vehicle purchases
through its own financing unit, First North American Credit Corporation
("FNAC"), and through third parties, and the sale of service policies. Since
opening of the first store in Richmond, Virginia in October 1993, CarMax retail
operations have grown rapidly, with total revenues of $77 million during the
first full fiscal year and $257 million for the six months ended August 31,
1996. CarMax has launched an aggressive, six-year rollout plan under which it
plans to open one additional store in Tampa, Florida by the end of fiscal 1997,
eight to 10 stores in fiscal 1998 and 15 to 20 stores each year thereafter
through fiscal 2002.
CarMax was established in 1993 by the Company, a leading U.S. consumer
electronics retailer, to revolutionize the highly fragmented $294 billion
used-vehicle retail market. CarMax was created as a result of the Company's
desire to develop a growth vehicle to sustain the Company's growth beyond the
end of the decade. CarMax was the first used-vehicle retailer to offer a large
selection of quality used vehicles at low, fixed 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 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. The Circuit City Group's focus on customer
satisfaction and operating efficiency has enabled it to become one of the
largest and most profitable consumer electronics companies in the United States,
with an ongoing and highly successful nationwide rollout of over 400 stores and
a 10-year compound annual growth rate in sales and earnings of 26 percent and 27
percent, respectively, for the period ended February 29, 1996. During the past
three years CarMax has leveraged, and continues to leverage, Circuit City's
operational expertise, innovative systems and resources to refine the
used-vehicle retailing concept, to develop store prototypes and proprietary
systems and to implement effective financial and operational controls that now
enable CarMax to embark on an aggressive, nationwide rollout. In addition,
CarMax currently intends to add new-car franchises to some of its existing and
new locations as it grows and to expand its retail repair service operations
commencing in fiscal 1998.
Automotive retailing, with more than $596 billion in 1995 sales, is the
largest consumer retail market in the United States, representing nearly 8
percent of the U.S. gross domestic product. Used-vehicle sales in 1995 were
approximately $294 billion, with approximately $232 billion in sales by
franchised and independent dealers and the balance in privately negotiated
transactions. CarMax believes that conditions in the used-vehicle retail market,
coupled with its operating and growth strategies, provide CarMax with an
opportunity for substantial growth.
OPERATING STRATEGIES
CarMax has pioneered and implemented operating strategies that enhance
customer satisfaction and loyalty and maximize operating efficiency. Since
opening its first store in Richmond, Virginia in October 1993, CarMax has
successfully implemented its operating model at five additional stores.
Excluding the Orlando, Florida store which opened November 6, 1996, each CarMax
store is profitable on a store-level basis including profits from vehicle
financing but before the allocation of Group overhead expenses. After incurring
significant startup, development and training expenses relating to the
development of the CarMax concept at the Richmond, Virginia store during fiscal
1994 and 1995, the Richmond store became profitable in fiscal 1996. Benefitting
from the refinement of the CarMax concept at the Richmond store, the two stores
in Atlanta, Georgia and the store in Raleigh, North Carolina all achieved such
store-level profitability within the first full year of operation and the store
in Charlotte, North Carolina has been profitable during the period since its
opening in March 1996.
LOW, FIXED "NO-HAGGLE" PRICES
CarMax has implemented an every-day low price strategy under which it sets
fixed, "no-haggle" prices on its used and new vehicles. Most prices are at or
below the best negotiated price in the market. Used vehicles at CarMax are
generally priced from $500 to $1,000 below National Automobile Dealers
Association ("NADA") average book value. Prices on all vehicles are clearly
displayed on each vehicle's price and information sticker and in CarMax
newspaper advertising.
VII-1
<PAGE>
BROAD SELECTION OF HIGH-QUALITY VEHICLES
Each CarMax store features a broad selection of quality used cars and light
trucks with a wide range of prices appealing to a wide range of potential
customers. CarMax stores vary in inventory size from 400 to 1,200 vehicles
depending on local market size and consumer demand. To appeal to the vast array
of consumer preferences and budgets, CarMax offers its used vehicles under two
programs -- the CarMax program and the ValuMax program. CarMax vehicles
generally are one to five years old, with less than 70,000 miles, and most are
priced from $9,500 to $21,000. Through the ValuMax program, CarMax sells
high-quality used vehicles that generally are more than five years old and/or
have over 70,000 miles, with most priced in a range from $4,500to $10,500. To
ensure that CarMax quality standards are maintained, vehicles under both
programs undergo a comprehensive, certified quality inspection by CarMax service
technicians. CarMax backs its commitment to quality with a five-day or 250-mile,
money-back guarantee and a free, 30-day comprehensive warranty on each vehicle.
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: (i)
dealers' attempts to combine the vehicle purchase transaction with the trade-in
transaction and the sale of related products; (ii) the confrontational
negotiations between the customer and the dealer; (iii) the difficulty the
customer experiences in obtaining sufficient information to make informed
decisions; (iv) interaction with multiple personnel at different stages of the
buying process; and (v) the hidden costs and inflated prices embedded in the
sales process. By contrast, the CarMax process enables customers to separately
evaluate 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 customer is assisted throughout
the CarMax sales process by the same sales consultant and by AutoMation, the
customer-friendly, point-of-sale system that is proprietary to CarMax.
(Bullet) SELECTION AND PRICE. Customers can use AutoMation to
electronically search an entire store's inventory for vehicles that meet
their model and feature requirements and price range. AutoMation 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 with customers.
(Bullet) TRADE-INS. CarMax has replaced the traditional "trade-in"
transaction with a process in which trained CarMax buyers appraise any
vehicle, usually in 30 minutes or less, and provide the vehicle's owner
with a written guaranteed cash offer that is good for seven days or 250
miles. The appraisal process is available to everyone, whether or not they
are purchasing a vehicle from CarMax. In contrast to the approach of
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.
(Bullet) FINANCING. The sales consultant uses AutoMation to
electronically submit financing applications and receive responses from
multiple lenders, generally in less than eight minutes. Customers are then
able to review online with the sales consultant financing options and terms
from each prime 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.
(Bullet) SERVICE POLICIES. CarMax offers primary and extended service
policies that have been custom-designed to its own specifications. CarMax
believes that superior coverage and low, fixed prices distinguish its
service policies from those of its competitors. Through AutoMation, the
customer can review online with the sales consultant all available service
policy options and costs and make an informed, unpressured decision. In
contrast, at many traditional dealers customers may feel pressured into
buying service policies they do not want at inflated prices.
(Bullet) FEES AND OPTIONS. CarMax does not charge processing,
administration, application or other "hidden" fees (as much as $400 at many
traditional auto dealers) and does not attempt to sell other options at
inflated prices. CarMax charges only state-required fees that are clearly
displayed on the vehicles and in the AutoMation system.
CarMax sales personnel play a significant role in ensuring a
customer-friendly sales process. All sales consultants, including both full and
part-time employees, are compensated solely on a commission basis. The amount of
the commission is a fixed dollar amount per vehicle sold. 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
VII-2
<PAGE>
of the CarMax 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.
SOPHISTICATED INVENTORY MANAGEMENT SYSTEMS AND CONTROLS
Through its inventory management systems and controls, CarMax minimizes
inventory carrying costs. AutoMation, the central feature of the CarMax
inventory management and control system, enables each vehicle to be tracked
throughout the sales process. Using the information provided by AutoMation, 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. CarMax maintains strict inventory aging policies under
which it disposes of any vehicle that has not been sold at retail within
specified periods. Less than one percent of CarMax's retail inventory is
ultimately sold at wholesale.
INCREASED EFFICIENCY THROUGH STANDARDIZATION AND IMPLEMENTATION OF "BEST
PRACTICES"
Since opening its first store in 1993, CarMax has acquired significant
knowledge and experience in operating used-vehicle stores and continually
refines its selling and operating procedures and store prototypes in order to
improve operating efficiency and customer service. As a result of this
experience, CarMax has adopted and implemented the "best practices" throughout
all of its stores by standardizing the most efficient and optimal processes.
CarMax believes that standardization of best practices will enable it to become
a low-cost operator within its industry.
ATTRACTIVE, EFFICIENT STORE PROTOTYPES
The CarMax store format provides an open and attractive physical
environment that CarMax believes enhances its customer-friendly and efficient
sales process and creates a unique shopping experience. The stores are currently
built in three different prototypes, with inventory capacity ranging from 400 to
1,200 cars, depending upon local market size and consumer demand. CarMax has
successfully implemented each of these prototypes.
GROWTH STRATEGIES
CarMax believes its operating strategies and the extensive experience of
its senior management team will enable it to capitalize on the significant
opportunities available in the large, highly-fragmented automotive retailing
industry. CarMax intends to aggressively grow its business through (i) a rapid
rollout of used-vehicle stores; (ii) the expansion of retail repair service
operations; and (iii) the addition of selected new-vehicle franchises.
RAPID ROLLOUT OF USED-VEHICLE STORES
CarMax currently operates six stores, with one each in the Richmond,
Virginia; Raleigh, North Carolina; Orlando, Florida; and Charlotte, North
Carolina markets; and two in the Atlanta, Georgia market. As a result of the
successful operation of its existing stores, CarMax has launched an aggressive,
six-year rollout plan under which it opened one store in Orlando, Florida on
November 6, 1996, and plans to open one additional store in Tampa, Florida by
the end of fiscal 1997, eight to 10 stores in fiscal 1998 (with most opening in
the second half of fiscal 1998) and 15 to 20 stores each year thereafter through
fiscal 2002. CarMax already has under contract most of the sites that it plans
to open in fiscal 1998. Under the rollout plan, CarMax expects that it will
experience a substantial increase both in overall square footage and in display
capacity, with square footage increasing from 0.2 million square feet at the end
of fiscal 1996 to between 4.6 and 5.9 million square feet at the end of fiscal
2002 and display capacity increasing from 2,909 vehicles to between 51,000 and
66,000 vehicles over the same period. In addition to growth from the opening of
new stores, CarMax expects that it will realize significant sales growth from
comparable store sales increases as newly opened stores mature. CarMax believes,
based on current trends, that each store will reach its planned mature sales and
earnings potential within four years of opening. However, given the infrequent
repeat purchase cycle on vehicles, sales and earnings may continue to grow
beyond this initial ramp-up period.
VII-3
<PAGE>
The following table sets forth information concerning the stores and
reconditioning centers that CarMax anticipates will be open by the end of fiscal
1998.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28 OR 29,
---------------------------------------------------
ACTUAL ESTIMATED
----------------------------- ------------------
1994 1995 1996 1997(1) 1998(2)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Stores:
Opened............................................................... 1 1 2 3 9
Operating at Year-End................................................ 1 2 4 7 16
Total Building Space (sq. ft.)....................................... 32,578 72,586 196,048 388,534 971,197
Average Building Space per Store (sq. ft.)........................... 32,578 36,293 49,012 55,505 60,700
Total Display Capacity............................................... 509 1,109 2,909 5,144 11,222
Total Service Bays................................................... 19 36 93 194 464
Reconditioning Centers:
Total Service Bays................................................... -- -- -- 40 120
</TABLE>
- ---------------
(1) Includes Tampa, Florida store scheduled to open in late fiscal 1997.
(2) Based on the average of the range for facilities anticipated to be opened in
fiscal 1998.
CarMax is currently targeting 45 of the top 50 U.S. markets. These are the
markets where it believes the most favorable demographic characteristics exist
and prime real estate sites are available on reasonable terms and, accordingly,
where attractive economic returns can be achieved. In selecting sites for its
new stores within a particular market, CarMax first undertakes an extensive
analysis of demographic, cost and other factors similar to the analysis
undertaken by the Circuit City Group when selecting sites for its new stores.
Given the importance of a convenient location in the consumer's decision on
where to shop, CarMax expects that multiple stores will be opened in most major
markets and all will be located in high-visibility, high-traffic commercial
areas. The goal of CarMax is to open most, if not all, of its planned stores
within a particular market as close in time as possible in order to immediately
begin realizing economies of scale in advertising, inventory management and
overhead. Each new store and center will be integrated into the AutoMation
system before opening. To better match individual market demand, CarMax has
developed three store prototypes with different display capacities ranging from
400 to 1,200 vehicles. CarMax has successfully implemented each of these
prototypes. CarMax continually reevaluates its store prototypes and, when
appropriate, makes improvements to promote efficiency in store operations and
enhance customer convenience.
Most of the initial inventory for a new CarMax store is acquired through
auctions and fleet purchases approximately three to four weeks prior to the
scheduled store opening date. As a store matures, an increasing percentage of
the store's inventory is acquired through an appraisal process in which CarMax
appraises and makes an offer to purchase any properly documented vehicle from
the public. See "CarMax Used-Vehicle Operations -- Sourcing." All used vehicles
require some reconditioning prior to being sold at retail. Specialized
reconditioning centers, such as the facility that CarMax operates in Orlando,
Florida, provide additional flexibility, helping to balance work load peaks with
new store openings and seasonal fluctuations. See "CarMax Used-Vehicle
Operations -- Reconditioning."
Shortly before a store opens, CarMax initiates its distinctive marketing
program using television and radio advertising to establish brand name
recognition. Upon opening, CarMax supplements its television and radio
advertising with a major newspaper campaign. These frequent print advertisements
generally list every vehicle in the store's inventory, with prices.
Each CarMax store has a location general manager, who oversees all of the
store's operations and personnel, and several department managers who are
responsible for sales, operations and purchasing. The location general manager
and the department managers for a new store are typically hired at least one
year prior to the scheduled store opening date. During the period prior to
opening, these managers participate in a rigorous training program at CarMax
headquarters and the existing stores that rotates them through most key
departments and operations of the business. The new management team arrives at a
store site approximately two to three months prior to the scheduled opening date
and assists in planning for the new store's opening. CarMax believes that its
work environment and incentive compensation programs will enable it to attract
and retain qualified personnel in each market it enters.
EXPANSION OF RETAIL REPAIR SERVICE OPERATIONS
CarMax plans to expand its retail repair service operations commencing in
fiscal 1998 in order to achieve greater future profitability, attract new
customers and further develop customer loyalty. Retail repair service operations
have historically
VII-4
<PAGE>
been a substantial source of dealer profitability, representing approximately 43
percent of dealers' 1995 profits according to the NADA. Currently, CarMax uses
its service facilities to inspect and recondition used vehicles acquired for
resale and to provide existing customers with limited maintenance and light
repair services. As part of the rollout of used-vehicle stores, CarMax plans to
open additional reconditioning centers that will perform an increasing share of
the inspection and reconditioning functions, thereby freeing up repair
facilities at the stores. Under the rollout plan, CarMax expects that its total
in-store service bays will increase from 194 expected at the end of fiscal 1997
to 2,580 expected at the end of fiscal 2002 (based on an average of the annual
range for facilities planned to be opened through fiscal 2002). CarMax is
currently operating prototypes for this expanded service at its Atlanta, Georgia
retail locations and is developing systems and procedures that are designed to
offer the retail-repair customer an efficient, customer-friendly process
consistent with the process that CarMax has developed for its vehicle sales
operations.
ADDITION OF NEW-VEHICLE FRANCHISES
CarMax believes that new-vehicle operations present opportunities for
incremental revenues and operational and financial synergies when combined with
used-vehicle operations. CarMax currently operates a Chrysler franchise at one
of its Atlanta, Georgia locations. In less than five months of operation, that
franchise surpassed the annual planning volume established by Chrysler. Based on
its experience to date with the Atlanta location, CarMax believes the addition
of a new-vehicle franchise to a used-vehicle store should provide incremental
revenues and contribute to the store's operating profits (including profits from
vehicle financing but before the allocation of group overhead expenses) during
the first full year of franchise operation. CarMax intends to aggressively
pursue new-car franchises for its new and existing stores both through
acquisition of franchises within the territory of its store operations and
through new grants. CarMax plans to add 15 to 25 new car franchises to its
used-car operations over the initial phase of its rollout through fiscal 2002.
However, given the relative unavailability of new franchises and the limited
availability of franchises within a suitable radius of its existing and proposed
stores, as well as the uncertain future willingness of manufacturers to approve
these transactions, CarMax cannot assure that it will be able to achieve this
portion of its growth plan. CarMax has received initial indications from several
foreign and domestic manufacturers of their willingness to approve CarMax as a
franchisee. CarMax is continuing to explore opportunities with these
manufacturers, as well as with existing franchised dealerships.
INDUSTRY OVERVIEW
CarMax believes that its business strengths and growth strategies position
it to take advantage of the business opportunities now available in automotive
retailing. Based on NADA data and the "Vehicle Remarketing Directory (1996),"
automotive retailing, with more than $596 billion in 1995 sales, is the largest
consumer retail market in the United States, representing nearly 8 percent of
the U.S. gross domestic product. Used-vehicle sales in 1995 were over $294
billion, with approximately $232 billion in sales by franchised and independent
dealers and the balance in privately negotiated transactions. In addition, 1995
retail sales of new vehicles, which are sold exclusively through franchised
dealers, were approximately $302 billion.
During the period from 1991 through 1995, used-vehicle sales grew at a
faster rate and were more profitable to dealers than new-vehicle sales. During
such period, used-vehicle unit sales through franchised dealers, independent
dealers and in privately negotiated transactions grew at an average annual rate
of 8.1 percent. From 1991 to 1994, used-vehicle unit sales grew at an average
rate of 9.0 percent and in 1995 continued to grow at 5.3 percent. By contrast,
after growing at an average annual rate of 7.0 percent from 1991 through 1994,
new-vehicle unit sales declined 2.1 percent in 1995. Dealerships also typically
offer a range of other services and products, including repair and warranty
work, replacement parts, extended warranty coverage, financing and credit
insurance. In 1995, parts and service represented approximately 12.4 percent of
the average dealership's total sales revenue.
USED-VEHICLE SALES
The market for used-vehicle sales through retail outlets and in privately
negotiated transactions in the United States has increased over the past five
years. CarMax believes that the factors that have led to growth in used-vehicle
sales include the substantial increases in new-vehicle prices, which have
prompted a growing segment of the vehicle-buying population to purchase more
affordable used vehicles, and the greater reliability and durability of used
cars resulting from the production of higher-quality vehicles. The used-vehicle
market is extremely fragmented with approximately 22,750 franchised dealers
accounting for $127 billion in 1995 sales. CarMax believes an even greater
number of independent used-vehicle dealers accounted for $105 billion in 1995
sales. Privately negotiated transactions accounted for the remaining 1995 sales,
estimated at $62 billion. In 1995, the top 100 franchised dealer groups
accounted for less than two percent of used-vehicle sales.
VII-5
<PAGE>
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 are conditions similar to those prevailing in
the consumer electronics retail business in the late 1970s and early 1980s.
Circuit City capitalized on those conditions by introducing its innovative
retailing format that led to a dramatic increase in its market share. CarMax
believes that current conditions in the used-vehicle industry offer similar
opportunities.
NEW-VEHICLE SALES
Over the past several decades, changes have occurred in the new-vehicle
retailing industry that CarMax believes could facilitate an expansion of its
new-vehicle operations. Since 1960, the number of franchised dealers has
declined approximately 35 percent to the current 22,750 level. CarMax believes
that further consolidation of franchised dealers is likely as megadealers
continue to put 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, in 1995, the largest 100 dealer groups, each with more than
$140 million in total revenues, accounted for less than 10 percent of revenues
from new-car sales in the U.S. and controlled less than 5 percent of all
franchises.
CARMAX USED-VEHICLE OPERATIONS
VEHICLES
CarMax offers its customers a broad selection of makes and models of used
vehicles, including both domestic and foreign manufactured cars and light
trucks, at competitive prices. The most popular models at CarMax stores include
Toyota Camry, Honda Accord, Ford Taurus, Ford Ranger and Ford Escort. To appeal
to the vast array of consumer preferences and budgets, CarMax offers its used
vehicles under two programs -- the CarMax program and the ValuMax program.
CarMax vehicles generally are one to five years old, with less than 70,000
miles, and most are priced from $9,500 to $21,000. The average CarMax vehicle is
between two and three years old, with 28,000 miles, and is priced at $13,900.
Through the ValuMax program, CarMax sells high-quality vehicles that generally
are more than five years old and/or over 70,000 miles, with most priced in a
range from $4,500 to $10,500. The average ValuMax vehicle is between five and
six years old, with 84,000 miles, and is priced at $6,900. In fiscal 1996,
approximately 96.6 percent of the used vehicles sold by CarMax were under the
CarMax program. CarMax has found in surveys that low prices are the primary
reason most customers buy at CarMax. Most CarMax and ValuMax vehicles are priced
from $500 to $1,000 below NADA average book value. Approximately 80 percent of
all used vehicles sold by CarMax in 1995 were priced between $8,500 and $20,500.
CarMax performs a comprehensive, certified quality inspection of each
vehicle. The CarMax commitment to quality is demonstrated to the customer
through a five-day or 250 mile, money-back guarantee and a free, 30-day
comprehensive warranty. Each CarMax vehicle must pass a comprehensive certified
quality inspection that covers all major and minor mechanical systems and all
safety functions as well as cosmetic criteria. Each ValuMax vehicle must pass a
certified quality inspection covering most major mechanical systems and all
safety functions. For ValuMax, concentration is placed on providing good, basic,
mechanically-sound transportation and, therefore, cosmetic corrections or repair
of convenience and/or luxury items such as electric mirrors, electric antennas,
etc. are generally not performed.
SOURCING
CarMax acquires a significant proportion of its used-vehicle inventory
through its unique appraisal process. Unlike the traditional trade-in process,
trained specialists at each CarMax store evaluate any vehicle that is properly
documented, typically in less than 30 minutes, and make an offer to the owner
that is good for seven days or 250 miles (subject only to the vehicle remaining
in substantially the same condition). CarMax believes that this process enables
it to tap into the private market as a significant additional source for used
vehicles and that vehicles purchased directly from consumers, such as those
acquired through the appraisal process, represent the highest quality used
vehicles available in the market because they have been maintained by their
owners. According to the Vehicle Remarketing Directory, of the 51.7 million used
vehicles sold in 1995, approximately 51.5 percent of the units were sold in
privately negotiated transactions. Because its operating strategy is to build
customer confidence and satisfaction by offering only quality vehicles, CarMax
resells at retail only one-third of the vehicles acquired through the appraisal
process. CarMax sells those vehicles that do not meet its retail standards at
its in-store wholesale auctions, generally at cost.
VII-6
<PAGE>
In addition to the appraisal process, CarMax acquires a significant
proportion of its used-vehicle inventory through auctions. Auction houses
facilitate the purchase and sale of vehicles sourced from dealers, rental and
fleet companies and wholesalers as well as off-lease vehicles, which accounted
for only 2.4 million unit sales in 1995, or 4.1 percent of total used-vehicle
unit sales, according to the "Vehicle Remarketing Directory." Most auctions are
open and can be attended by the entire dealer community; the remainder are
"closed" except to the franchised dealers of specific manufacturers. Mannheim
Auto Auction, Inc., the largest U.S. vehicle auctioneer, reports that
approximately 75 percent of all vehicles it auctioned in 1995 were sold at open
auctions. In addition to attending open auctions, CarMax can attend Chrysler's
closed auctions and purchase used vehicles for resale at the CarMax Chrysler
franchise in Atlanta, Georgia. CarMax regularly buys directly from other
traditional sources as well, including wholesalers, franchised and independent
dealers and fleet owners, such as leasing companies and rental companies.
All used vehicles are evaluated on the basis of their wholesale cost and
cost of reconditioning and, for purchases off-site from traditional sources,
cost of delivery to the reconditioning center and the store. Buyers based at the
stores, supported by regional buyers and headquarters staff, purchase most of
the CarMax inventory. Buyers at both the store and regional level, as well as
headquarters staff, rely on the extensive inventory and sales trend data
available through AutoMation. See " -- Vehicle Inventory Management" and
"Automated Systems."
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. Management believes that development of this
unique training program for buyers has provided CarMax with a competitive
advantage over its existing and potential competitors. All significant
purchasing decisions are made by trained personnel. CarMax uses data from
AutoMation to monitor and evaluate the performance of its buyers on an on-going
basis.
Based on consumer acceptance of the appraisal process at existing CarMax
stores and the experience and success of CarMax to date in acquiring vehicles
from traditional 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
The Circuit City Group has successfully designed and implemented
computer-based management systems to promote efficiency in inventory management
and improve profitability. See "Automated Systems." Leveraging the Circuit City
expertise in this area, CarMax developed and implemented AutoMation, a
sophisticated, computerized inventory management and point-of-sale system, that
is unique to the automobile retail 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. Parts
of the system can also be accessed directly by customers as a key component of
the customer-friendly CarMax shopping process. See "Operating
Strategies -- Efficient, Customer-Friendly Sales Process" and "Automated
Systems."
From the time CarMax appraises a used vehicle until the vehicle is sold,
all relevant information relating to that vehicle is entered into AutoMation.
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 on-site
parking place, in order 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 AutoMation with
data from customer and market surveys and from private and governmental reports
analyzing local, regional and national vehicle-purchasing trends.
The quality of inventory is reevaluated weekly by headquarters personnel
with respect to price, store and lot location and other factors and, if
warranted, appropriate adjustments to those factors are recommended to the
store's purchasing manager. CarMax currently turns its vehicle inventory
approximately nine times each year. Under its strict inventory aging policy,
CarMax disposes of any vehicle that has not been sold at retail within specified
periods. Less than one percent of CarMax's retail inventory is ultimately sold
at wholesale.
VII-7
<PAGE>
RECONDITIONING
A key element of the CarMax operating strategy is to provide customers with
high-quality used vehicles and to reinforce customer confidence in that quality
through the CarMax five-day or 250-mile, money-back guarantee and free, 30-day
comprehensive warranty. To meet this quality commitment, all used vehicles sold
at retail by CarMax are subjected to a comprehensive certified quality
inspection. Based on this quality inspection, CarMax determines the
reconditioning necessary to bring the vehicle up to CarMax retail standards. All
vehicles sold to CarMax retail customers require some reconditioning. Vehicles
requiring more reconditioning than can be performed profitably are sold at
in-store wholesale auctions.
CarMax performs most routine mechanical and minor body repairs itself; for
major mechanical repairs as well as glass replacement and painting, CarMax
currently engages third parties specializing in those services. During the past
year, 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.
Reconditioning services are currently performed at each store as well as at
a specialized center in Orlando, Florida dedicated to reconditioning vehicles
for sale at stores in the Florida, Georgia and North Carolina markets. To
support its planned rollout of used-vehicle stores, CarMax plans to open
additional reconditioning centers that will perform an increasing share of the
inspection and reconditioning functions. See "Growth Strategies -- Rapid Rollout
of Used-Vehicle Stores" and "Service and Parts." CarMax expects to continue to
provide reconditioning services at the stores, primarily for vehicles acquired
at the store locations (such as those acquired through the appraisal process) or
otherwise where the cost of transport-
ing a vehicle to and from the reconditioning center would exceed the savings to
be achieved by performing such services at a more efficient, specialized
facility.
The reconditioning center in Orlando has approximately 40 service bays and
can recondition up to 2,000 vehicles per month. The existing CarMax stores have
a range of 17 to 40 service bays of which 10 to 20 are dedicated to
reconditioning. The stores are currently capable of reconditioning on average
between 500 and 1,000 cars per month. In addition to the extra capacity expected
to be provided by new reconditioning centers, CarMax believes it can create
additional capacity, if needed, at its existing facilities by installing more
service bays, employing more technicians and increasing hours of operation.
SERVICE AND PARTS
CarMax service departments currently perform minor repair services at all
store locations under the CarMax free, 30-day comprehensive warranty on used
vehicles and more extensive warranty service on Chrysler vehicles at the CarMax
new-car franchise in Atlanta, Georgia. CarMax plans to expand its retail repair
service operations, including service performed under CarMax service policies,
and is currently operating prototypes for such expanded service at its Atlanta,
Georgia retail locations. CarMax is developing systems and procedures that are
intended to ensure that the CarMax retail repair service operations are
conducted in the same customer-friendly and efficient manner as the other CarMax
operations. Commencing in fiscal 1998, CarMax intends to offer the expanded
retail repair service to the public at all existing and future store locations.
Expansion of retail repair service will be facilitated by the planned rollout of
additional reconditioning centers that will perform an increasing share of the
inspection and reconditioning functions, freeing up space at the retail stores
for the additional retail repair work. See "Growth Strategies -- Rapid Rollout
of Used-Vehicle Stores" and "CarMax Used-Vehicle Operations -- Reconditioning."
CarMax believes that the efficiency of its service operations are enhanced
by its use of lateral support groups in servicing and reconditioning vehicles as
well as by its compensation programs which 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 AutoMation.
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 it enters. 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 sold by CarMax. Technicians at the
CarMax new-car franchise in Atlanta, Georgia also attend manufacturer-sponsored
training programs to stay abreast of current diagnostic, repair and maintenance
techniques for Chrysler-manufactured vehicles. In addition, utilization of
lateral support groups allows for greater on-the-job training opportunities for
new technicians.
VII-8
<PAGE>
The CarMax parts departments currently support both the reconditioning and
warranty service functions of the business. Upon completion of the current test
for expanded retail services, CarMax may consider the promotion of retail sales
of accessories in those expanded operations.
CARMAX NEW-VEHICLE OPERATIONS
CarMax believes that the sources of consumer dissatisfaction associated
with the traditional used-vehicle buying process are similar to those
experienced in new-vehicle purchasing. As a result, CarMax believes that its
approach to used-vehicle sales can be successfully applied to new-vehicle
retailing.
CarMax currently operates a Chrysler franchise at one of its Atlanta,
Georgia locations where it employs the same efficient customer-friendly sales
process as in its used-vehicle operations. It offers new cars with a full range
of related services, at low, "no-haggle" prices and uses AutoMation to provide
complete information to the customer regarding vehicle inventory, as well as
financing and service policy options. Unlike many traditional new-car dealers,
it does not charge processing, administration, application or other "hidden"
fees and does not attempt to sell other options at inflated prices.
CarMax was able to add the Chrysler franchise to one of its existing
used-car operations by expanding the available display space, hiring additional
sales consultants and producing advertising relating specifically to its new
vehicles. The new-vehicle operation has been successful to date, surpassing in
less than five months of operation the annual planning volume established by
Chrysler and permitting CarMax to achieve additional leverage on its store
overhead and other costs. Based upon its experience to date with the Atlanta
location, CarMax believes the addition of a new-vehicle franchise to a used-
vehicle store should provide incremental revenues and contribute to the store's
operating profits (including profits from vehicle financing but before the
allocation of Group overhead expense) during the first full year of franchise
operation. CarMax intends to aggressively pursue new car franchises for its new
and existing stores both through acquisition of franchises within the territory
of its store operations and through new grants. CarMax plans to add 15 to 25 new
car franchises to its used-car operations over the initial phase of its rollout
through fiscal 2002. However, given the relative unavailability of new
franchises and the limited availability of franchises within a suitable radius
of its existing and proposed stores, as well as the uncertain future willingness
of manufacturers to approve these transactions, CarMax cannot assure that it
will be able to achieve this portion of its growth plan. CarMax has received
initial indications from several foreign and domestic manufacturers of their
willingness to approve CarMax as a franchisee. CarMax is continuing to explore
opportunities with these manufacturers, as well as with existing franchised
dealerships.
VEHICLE FINANCING
CarMax provides financing for its customers' vehicle purchases through its
financing unit, FNAC, and also arranges financing through NationsBank, N.A.
("NationsBank") and other third-party lenders. After a customer has selected a
vehicle to purchase, a financing application is submitted electronically through
AutoMation to both FNAC and NationsBank, where computerized systems evaluate the
creditworthiness of the customer. Based upon multiple credit bureau checks,
information provided by the customer and credit standards prescribed by the
lender, CarMax presents qualified customers with financing offers from either
FNAC or NationsBank, or both, typically within less than eight minutes. If the
customer fails to meet the automated standards for expedited credit approval,
the lenders' credit personnel undertake further analysis, following which an
adjustment to the terms of the proposed credit may be made or, in cases of more
serious credit problems, the application may be forwarded to one or more
third-party lenders specializing in sub-prime credit loans. All financings are
typically installment contracts secured by the vehicles financed and generally
require a down payment. Customers are permitted to refinance their loans within
three days of a purchase without incurring any finance or related charges.
FNAC generates income from the financing it provides to CarMax customers
primarily through the sale and servicing of the contract receivables it
originates. In addition, FNAC enables CarMax to make credit decisions based on
overall business considerations and thus helps to ensure the reasonable
availability of credit to support CarMax vehicle sales (while retaining its
prudent 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 service polices it sells
reduce 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. CarMax provides financing for
approximately 70 percent of its customers through its prime lenders, with about
half of these prime loans placed by FNAC. Another five to 10 percent of CarMax
used-vehicle financing is provided by third-party sub-prime lenders. The CarMax
arrangements with NationsBank and other third-party lenders 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.
VII-9
<PAGE>
FNAC currently sells contract receivables to Enterprise Funding Corporation
("EFC"), a corporation unaffiliated with the Company, which purchases interests
in contract receivables and similar assets originated by third parties. EFC
finances its purchase of such interests, including its purchase of an undivided
interest in the contract receivables originated by FNAC, primarily through the
issuance of commercial paper. CarMax retains a subordinated undivided interest
in FNAC's receivables to the extent of the excess of the receivables balance
over EFC's investment in the receivables and continues to service the
receivables for a monthly servicing fee. CarMax has no additional liability on
the receivables sold to EFC. CarMax currently expects that the total capacity of
its arrangement with EFC will increase as its business and financing needs grow.
As an alternative to loan financing, CarMax also arranges lease financing
for its new-vehicle customers through Chrysler and NationsBank. CarMax's
arrangements with Chrysler and NationsBank provide for payment of a fee to
CarMax at the time of financing. CarMax plans to offer lease financing for its
used vehicles on a selected basis beginning in fiscal 1998.
CarMax recognizes income from the sale of its contract receivables to EFC
at the time of sale. Participation fees from third-party lenders and lessors are
recognized for financial reporting purposes at the time of sale.
SERVICE POLICY SALES
At the time of a vehicle sale, CarMax offers to sell to the customer either
a primary service policy or, in the case of a new or used vehicle still covered
by the manufacturer's warranty, an extended service policy to supplement the
warranty provided by the manufacturer. The service policies are offered at a
low, fixed price. All service policies sold by CarMax have been custom-designed
to its own specifications and are administered by Virginia Surety Company, Inc.,
a subsidiary of AON Corporation, under a private-label arrangement under which
CarMax receives a fee from the administrator at the time the service policy is
sold. CarMax offers comprehensive bumper-to-bumper service policies called
"MaxCare" on its CarMax vehicles and comprehensive power train service policies
on its ValuMax vehicles.
Repair services under the policies sold by CarMax are currently provided
primarily through a network of preferred dealers, although customers are
permitted to obtain covered services from any source. CarMax believes that the
quality of the services provided by its preferred dealer network, as well as the
broad scope of its service policies, helps promote customer satisfaction and
loyalty and thus increases the likelihood of repeat and referral business. As
part of its planned expansion into retail repair service, CarMax expects that in
fiscal 1998 it will begin performing some of the repair service under those
policies at its own stores. See "Growth Strategies -- Expansion of Retail Repair
Service Operations" and "Service and Parts." CarMax already performs minor
repair work at all store locations under its free, 30-day comprehensive warranty
and more extensive warranty service on Chrysler vehicles at its new car
dealership in Atlanta.
In most states, CarMax retains no liability on the service policies it
sells and thus recognizes all of the income from fees paid by the third-party
administrator at the time of sale. In states where third-party service policy
sales are not permitted by law, CarMax sells its own service policies with
revenue deferred and recognized over the life of the contract based on industry
experience.
AUTOMATED SYSTEMS
CarMax believes that the application of computer-based management
technology to retailing promotes efficiency and profitability and enables the
Group to provide better service to its customers. With a full-time staff of more
than 70 MIS professionals, CarMax has made a commitment to improving its
existing technology and extending the use of technology to all areas of its
business -- used vehicles, new vehicles, and retail repair service, as well as
financial management and accounting systems. Access to Circuit City's technology
resources and experience has been and continue to be important to CarMax. The
first CarMax employee was an MIS associate from Circuit City who led the
AutoMation development effort. Information systems at CarMax are currently
managed by three individuals at the director level who had an average of seven
years' experience with Circuit City before transferring to CarMax. CarMax
supplements these resources with strategic guidance from Circuit City's Chief
Information Officer and key members of the Company's management information
systems team, as well as outside consultants.
CarMax has leveraged Circuit City's experience in automating over 400
retail sites nationwide to develop and implement AutoMation, a proprietary
inventory and point-of-sale system that links the CarMax headquarters with all
of its facilities and provides near real-time data collection and communication
among all parts of its business. AutoMation makes it possible for CarMax
management to collect and analyze information from each store and reconditioning
center to control inventory, analyze sales, refine sales strategies, evaluate
performance and help determine compensation of sales consultants,
VII-10
<PAGE>
technicians, buyers and managers and, ultimately, measure profitability.
AutoMation is also a key component at each step of the CarMax sales process,
providing information to customers about available inventory, financing, service
policies and fees and options, including pricing and terms.
CarMax anticipates that efficiencies generated by its substantial
investment in people, systems and hardware should position it as a low-cost
operator in its industry. CarMax believes that its commitment to the application
of computer-based management technology to retailing represents an important
competitive advantage and plans to make significant increases to its MIS staff.
MARKETING AND ADVERTISING
CarMax marketing strategies are focused on developing general 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 marketing strategies are implemented
primarily through newspaper, television and radio advertising. CarMax is able to
realize significant cost savings on advertising by purchasing its advertising
jointly with the Circuit City Group, thus leveraging Circuit City's tremendous
media buying power. In fiscal 1995, the Circuit City Group was one of the
largest purchasers of newspaper advertising and spot television advertising in
the United States. As additional stores are opened in a particular market,
CarMax expects to realize further cost economies as a result of even greater
leveraging of its advertising expenses in the local market area over a larger
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.
Newspaper advertisements are designed to attract persons who have already
decided to purchase a vehicle by showing the variety, depth and low prices of
the CarMax selection in the type of vehicle desired. Such advertisements
typically involve multi-page spreads and are published three times a week. The
innovative approach of CarMax to newspaper advertising includes listing the
price of each vehicle available for sale, thereby facilitating comparison price
shopping by the consumer. CarMax television and radio advertisements are
designed to increase public awareness of the advantages of shopping at CarMax,
including the low, "no-haggle" prices, the broad selection of new and/or quality
used vehicles in a wide range of prices and the customer-friendly service.
CarMax is the sole national auto retailing sponsor of CarTalk(Register mark), a
national radio talk show designed to assist callers with their car repair
problems. CarTalk(Register mark) is currently aired on 372 stations nationwide
on National Public Radio. 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 marketing staff with the purchasing departments at the
selected locations to ensure that appropriate quantities of the targeted
inventory are purchased and displayed, thus maximizing the benefits of the
promotion.
MANAGEMENT OF THE CARMAX GROUP
CarMax has leveraged the demonstrated expertise of Circuit City in the
high-volume, nationwide rollout of retail stores to build a management team
dedicated to the implementation of the CarMax business strategy in automobile
retailing. CarMax anticipates that it will rely on this core team to develop the
location managers that the business will need nationally in order to ensure
successful implementation of the CarMax growth strategy. Set forth below is
brief biographical information relating to the Chairman of the Board, President
and Chief Executive Officer of the Company, the Senior Vice President, Chief
Financial Officer and Secretary of the Company and the other members of the
CarMax management team.
RICHARD L. SHARP is Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Sharp joined the Company as an Executive Vice
President in 1982. He became President of the Company in 1984, Chief Executive
Officer in 1986 and Chairman of the Board in 1994. He is a director of James
River Corporation of Virginia and Flextronics International, Ltd. He has been a
director of the Company since 1983.
MICHAEL T. CHALIFOUX is Senior Vice President, Chief Financial Officer and
Secretary of the Company. Mr. Chalifoux joined the Company in 1983 as Corporate
Controller and was elected Vice President and Chief Financial Officer in 1988.
He became Senior Vice President and Chief Financial Officer in 1990 and
Secretary in 1993. He has been a director of the Company since 1991. He was
instrumental in establishing and expanding both Circuit City's and CarMax's
credit operations.
W. AUSTIN LIGON is President of CarMax and Senior Vice President of
Automotive for the Company. Mr. Ligon joined the Company in 1990 as Vice
President of Corporate Planning and was named Senior Vice President in 1991. Mr.
Ligon came to Circuit City from Marriott Corporation where he was Senior Vice
President of Strategic Planning for Marriott Hotels
VII-11
<PAGE>
and Resorts. He joined Marriott in 1984 as Director of Corporate Planning and
Business Development. He also served as Vice President of Marketing in
Marriott's family restaurant division and as Vice President and General Manager
of the Allie's Restaurant Division.
MARK F. O'NEIL is Vice President and General Manager of CarMax. Mr. O'Neil
joined the Company in 1992 as Director of Special Projects for the new
automotive division and was promoted to Vice President and General Manager in
1995. Mr. O'Neil had prior automotive experience with Ertley Motorworld, a
dealer with 19 franchises based in Wilkes-Barre, Pennsylvania, where he was
President and Chief Operating Officer from 1990 to 1992. Mr. O'Neil had
additional automotive experience with BTE/Collision Repair Experts, Inc. in
Philadelphia, Pennsylvania, where he was a General Manager/Partner from 1988 to
1990 and GKN Autobody in Memphis, Tennessee, where he was Director of
Development and Marketing from 1987 to 1988.
KEITH D. BROWNING is Vice President and Chief Financial Officer for CarMax
and Vice President of the Company. Mr. Browning joined the Company in 1982 as
Assistant Controller for the West Coast Division of Circuit City and was the
Controller for the division from 1984 to 1987. In 1987 Mr. Browning was
appointed Assistant Controller for the Company and was promoted to Corporate
Controller in 1990. Mr. Browning was promoted to Vice President of the Company
in 1995 and joined CarMax in early 1996. Mr. Browning has had extensive
experience with the rollout of other Circuit City business concepts, beginning
with the initial Circuit City Superstore rollout for the West Coast Division.
Mr. Browning has been involved in the development of accounting procedures,
systems and internal controls for CarMax since its inception.
THOMAS J. FOLLIARD is Vice President of Merchandising for CarMax. Mr.
Folliard joined CarMax in 1993 as the Senior Buyer and became the Director of
Purchasing in 1994. Mr. Folliard was promoted to his current position in 1996.
He is responsible for the purchasing functions of the Group and has been
instrumental in the design and development of the buyer training program and
in-store wholesale auction process. Mr. Folliard's prior experience was with Jim
Rathman Chevrolet/Cadillac in Melbourne, Florida in auto wholesaling from 1989
to 1993 where he was a member of one of the largest wholesale-buying groups in
the southeastern U.S..
FRED S. WILSON is Assistant Vice President, Loss Prevention for CarMax. Mr.
Wilson joined the Company in 1990 as Director of Loss Prevention and was
promoted to Assistant Vice President, Loss Prevention in 1993. Mr. Wilson has
several years "big-ticket" retail experience as well as several years of
high-volume retail experience. Mr. Wilson joined CarMax in August of 1996.
In addition to the senior management listed above, location general
managers provide important depth to the CarMax management team. The CarMax store
management team averages approximately eight years of experience in retailing
and approximately three years of experience in automotive retailing prior to
joining CarMax. CarMax expects the location general managers that will be
appointed for fiscal 1998 store openings will have an average of approximately
three years experience with CarMax.
FACILITIES
CarMax currently operates six stores in Virginia, North Carolina, Georgia
and Florida. All CarMax stores are located in high-visibility, high-traffic
commercial areas. CarMax utilizes three original store prototypes that vary in
display capacity from 400 to 1,200 vehicles depending on local market size,
consumer demand and other factors. The "C" prototype is designed to serve the
most populous trade areas and offers the largest merchandise assortment, with
approximately 82,000 square feet of building space and a display capacity of up
to 1,200 vehicles. The "B" prototype is designed for medium-sized markets, with
approximately 66,000 square feet of building space and a display capacity of up
to 800 vehicles. The "A" prototype is designed to serve primarily smaller
markets and trade areas that are on the fringes of larger metropolitan markets,
with approximately 53,000 square feet of building space and a display capacity
of up to 600 vehicles.
VII-12
<PAGE>
In April 1996, CarMax opened a specialized center in Orlando, Florida
dedicated solely to reconditioning vehicles for sale at stores in the Georgia,
Florida and North Carolina markets. The reconditioning center has approximately
40 service bays and can recondition up to 2,000 cars per month.
The following table summarizes CarMax facilities as of November 30, 1996:
<TABLE>
<CAPTION>
BUILDING SQUARE FOOTAGE
--------------------------------------
DISPLAY CAPACITY SELLING AND
(UNITS) SERVICE AREA OTHER AREA TOTAL
---------------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Atlanta, Georgia (Town Center)........................................ 613 14,758 21,906 36,664
Atlanta, Georgia (Gwinnett)........................................... 1,187 40,451 46,347 86,798
Charlotte, North Carolina............................................. 777 28,920 27,131 56,051
Orlando, Florida...................................................... 684 31,265 27,996 59,261
Raleigh, North Carolina............................................... 600 19,419 20,589 40,008
Richmond, Virginia.................................................... 509 18,299 14,279 32,578
Tampa, Florida (1).................................................... 774 41,498 35,676 77,174
Orlando, Florida Reconditioning Facility.............................. -- 37,000 5,280 42,280
</TABLE>
- ---------------
(1) Under construction
CarMax currently leases its headquarters, which is located in suburban
Richmond, Virginia, near both the main offices of the Circuit City Group and the
site of the first CarMax retail store.
FRANCHISE AGREEMENT WITH CHRYSLER
CarMax operates a new-car franchise at one of its Atlanta, Georgia stores
under a franchise agreement (the "Franchise Agreement") between Chrysler and the
CarMax Group. The Franchise Agreement provides, among other things, that CarMax
has the right and obligation to sell specified models of new
Chrysler-manufactured vehicles and provide related parts and service solely at
the Atlanta, Georgia location, and that CarMax will not sell or service at that
location any new vehicles not manufactured by Chrysler. The Franchise Agreement
expressly permits CarMax to sell and service used vehicles at this location,
regardless of the manufacturer. The Franchise Agreement also grants CarMax the
non-exclusive right to use and display Chrysler's trademarks, service marks and
designs in the form and manner approved by Chrysler. As is typically the case,
the Franchise Agreement does not guarantee exclusivity within a specified
territory. The Franchise Agreement also imposes requirements on CarMax
concerning such matters as the facilities and equipment for servicing vehicles,
the maintenance of vehicles and parts, and the training of personnel. Compliance
with these requirements is closely monitored by Chrysler. The Franchise
Agreement does not have a specified expiration date, but may be terminated by
CarMax on not less than 30 days written notice for any reason and by Chrysler on
generally not less than 60 days written notice for specified reasons, including
a breach by CarMax of any of its obligations thereunder or if, without
Chrysler's prior approval, the Company ceases to control the subsidiary that
entered into the agreement.
The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the generally unequal
bargaining power between the parties. For example, under the laws of Georgia, a
manufacturer may not terminate a franchise without good cause and may not
arbitrarily withhold approval for a proposed change in ownership unless it
offers to purchase the franchise from the dealer.
COMPETITION
The automotive retailing industry is highly competitive. Consumers
typically have many choices in deciding where to purchase a used or new vehicle,
particularly in the larger markets that CarMax intends to target as part of its
expansion plan. In both the used- and new-vehicle markets, CarMax seeks to
distinguish itself from traditional dealerships through its sales approach and
other innovative operating strategies.
In the used-vehicle market, CarMax competes with franchised dealers,
independent used-car dealers, automobile rental agencies and private parties.
CarMax anticipates that it will also face competition from other used-car stores
that currently employ or may adopt non-traditional selling methods similar to
those used by CarMax. CarMax believes that the principal competitive factors in
used-vehicle sales are the following: price; the ability to offer a wide
selection of vehicles, including the more popular makes and models; the quality
of the vehicles; the location of retail sites; and the 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 its
stores are
VII-13
<PAGE>
competitive in all of these areas and enjoy certain advantages over its
competitors that employ traditional selling methods. See "Operating
Strategies -- Efficient, Customer-Friendly Sales Process."
In the new-vehicle market, CarMax competes with other franchised dealers
offering vehicles produced by the same or other manufacturers, auto brokers and
leasing companies. CarMax believes that the principal competitive factors in
new-vehicle sales are the following: price; dealer sales promotions; the ability
of dealerships to offer a wide selection of the most popular vehicles; the
location of retail sites; and the quality of customer service. CarMax believes
its new-vehicle store in Atlanta, Georgia is competitive in all of these areas;
however, because the franchise was awarded in 1995 and because of the inventory
allocation system utilized by Chrysler under which future allocations are based
on prior sales, the store has not yet reached the inventory levels that CarMax
expects to be available at maturity. Given that the new-vehicle market has
historically been served primarily by dealerships employing traditional
marketing techniques, CarMax believes that its use of innovative selling methods
will create additional competitive factors in which CarMax may have an
advantage. See "Operating Strategies -- Efficient, Customer-Friendly Sales
Process."
When arranging or providing financing for its customers' vehicle purchases,
CarMax, through FNAC, competes with a broad range of financial institutions.
CarMax believes that the principal competitive factors in offering financing are
convenience, interest rates and contract terms. CarMax believes that it is
competitive in all of these areas.
In addition to being affected by national competitive trends, the success
of CarMax depends, in part, on regional auto buying trends, local and regional
economic factors and other regional competitive pressures. Currently, CarMax
sells its vehicles in Virginia, North Carolina, Florida and Georgia. Conditions
and competitive pressures, such as aggressive discounting by manufacturers or a
general economic downturn in the region, affecting these markets or new markets
that CarMax enters could adversely affect CarMax, although the automotive retail
industry as a whole might not be affected.
SERVICE MARKS
The marks "CarMax," "CarMax The Auto Superstore," "The New Way to Buy Used
Cars," "MaxCare," "ValuMax" and "AutoMation" are federally registered service
marks of CarMax, and CarMax considers these marks and the accompanying goodwill
and customer recognition to be valuable to its business. CarMax has applied for
or received federal registrations for numerous other service marks routinely
used in its business, including variations of, and designs associated with,
those named above. Such registrations can be kept in force in perpetuity through
continued use of the marks and timely applications for renewal. For a
description of certain legal proceedings related to the CarMax mark, see "Legal
Proceedings and Insurance."
GOVERNMENTAL REGULATION
The CarMax operations are subject to ongoing regulation, supervision and
licensing under various 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.
The financing activities of CarMax with its customers are subject to
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, the CarMax 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 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.
VII-14
<PAGE>
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.
EMPLOYEES
On November 30, 1996, CarMax had 1,368 employees, of whom 146 were employed
in store managerial positions, 351 were employed on a commission basis in
non-managerial store sales positions, 595 were employed in non-managerial
purchasing, parts and service positions and the balance were employed in other
administrative and managerial positions. Management of CarMax considers its
relationship with its employees to be good. None of the CarMax employees is
subject to a collective bargaining agreement.
LEGAL PROCEEDINGS AND INSURANCE
By letter dated April 26, 1996, OfficeMax, Inc. accused the Company of
infringing OfficeMax, Inc.'s trademark rights by using the mark CARMAX. The
Company denies such allegations and on May 19, 1996, filed suit in the U.S.
District Court for the Eastern District of Virginia seeking a declaratory
judgment that the Company's use and registration of the mark CARMAX and other
marks containing MAX as a prefix or suffix do not violate any rights of
OfficeMax, Inc. On June 10, 1996, OfficeMax, Inc. filed a counterclaim against
the Company seeking unspecified damages and an order enjoining the Company from
using certain marks, including the mark CARMAX. On October 22, 1996, the Court
granted the Company's motion to file an amended complaint requesting, among
other things, that certain of OfficeMax, Inc.'s marks be cancelled or declared
void. On November 1, 1996, OfficeMax, Inc. filed an amended complaint
requesting, among other things, that certain of the Company's marks be cancelled
or declared void. The Court has severed the parties' amended claims from the
original declaratory judgment suit. A trial on the declaratory judgment suit has
been set for February 12, 1997. Although it is impossible to predict the outcome
of this litigation, the Company believes that it has a valid basis for its
complaint and that OfficeMax, Inc.'s allegations and counterclaims are without
merit.
In addition to the matters described above, CarMax is involved in various
legal proceedings that arise in the normal course of business. Based upon its
evaluation of the information currently available, CarMax believes that the
ultimate resolution of such proceedings will not have a material adverse effect
on the financial position, liquidity or results of operations of CarMax.
CarMax maintains general liability and property insurance and an umbrella
and excess liability policy in amounts it considers adequate and customary for
businesses of its kind. However, there can be no assurance that CarMax will not
experience legal claims in excess of its insurance coverage or claims which are
ultimately not covered by insurance.
VII-15
<PAGE>
CARMAX GROUP
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS................................................................................. VII-17
FINANCIAL STATEMENTS
Statements of Operations -- Years Ended February 29 or 28, 1996, 1995 and 1994..................................... VII-21
Balance Sheets -- February 29 or 28, 1996 and 1995................................................................. VII-22
Statements of Cash Flows -- Years Ended February 29 or 28, 1996, 1995 and 1994..................................... VII-23
Statements of Accumulated Group Deficit -- Years Ended February 29 or 28, 1996, 1995 and 1994...................... VII-24
Notes to Group Financial Statements................................................................................ VII-25
Report of KPMG Peat Marwick LLP, Independent Auditors.............................................................. VII-35
INTERIM FINANCIAL STATEMENTS
Statements of Operations -- Six Months Ended August 31, 1996 and 1995 (unaudited).................................. VII-36
Balance Sheets -- August 31, 1996 (unaudited) and February 29, 1996................................................ VII-37
Statements of Cash Flows -- Six Months Ended August 31, 1996 and 1995 (unaudited).................................. VII-38
Notes to Group Financial Statements (unaudited).................................................................... VII-39
</TABLE>
VII-16
<PAGE>
CARMAX GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The CarMax Group (the "Group") began operations with one store in Richmond,
Virginia, in October of the fiscal year ended February 28, 1994. As of August
31, 1996, the Group operated five retail locations. Three different store
formats, which vary in acreage, vehicle assortment and facility square footage
allow the Group to tailor its operations to the populations and volume
expectations for specific trade areas. The "C" store in operation today covers
30 acres with room to display up to 1,200 vehicles and includes an 86,000 square
foot showroom, reconditioning and service facility. The one "B" format store
covers 21 acres, has room to display up to 770 vehicles and includes a 56,000
square-foot facility. The three "A" format stores average 12 acres, have room
for up to 600 vehicles and include facilities that average 36,000 square feet.
Early in the current fiscal year at the Group's used car "C" store location
in Atlanta, Georgia, CarMax began selling new Chrysler, Plymouth, Jeep and Eagle
vehicles under the terms of a franchise agreement with Chrysler Corporation.
The table below details CarMax retail units:
<TABLE>
<CAPTION>
August 31 February 28 or 29
--------------- ----------------------------
1996 1995 1996 1995 1994
---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
"C" Store...................................................... 1 1 1 -- --
"B" Store...................................................... 1 -- -- -- --
"A" Store...................................................... 3 3 3 2 1
-
------ ------ ------ ------
Total.......................................................... 5 4 4 2 1
--- ------ ------ ------ ------
--- ------ ------ ------ ------
</TABLE>
RESULTS OF OPERATIONS -- FISCAL YEARS 1996, 1995 AND 1994
In order to present historical financial information which represents the
business defined as the CarMax Group, certain reclassifications have been made
to conform the results of operations for all periods presented. The accounts of
the Company's test in wholesaling used cars, which has ceased operation, were
excluded from the CarMax Group's results of operations. As a result, both net
sales and net losses are lower than previously reported amounts.
SALES GROWTH
Total sales increased 258 percent in fiscal 1996, to $275.9 million. In
fiscal 1995 total sales increased 376 percent to $77.0 million from $16.2
million in fiscal 1994. The fiscal 1996 sales growth primarily reflects the
addition of new locations and includes a 12 percent comparable stores sales
increase for one location classified as a comparable store throughout the year
and a second location classified as a comparable store for a portion of the
year. The fiscal 1995 growth includes a 43 percent comparable store sales
increase for one location classified as comparable for a portion of the year.
In most states, CarMax sells service policies on behalf of an unrelated
third-party and has no contractual liability to the customer under the service
policy program. Commission revenue from third-party service policy programs is
recognized immediately. In states where third-party service policy sales are not
permitted by law, CarMax sells its own service policies. Revenues from the
Group's service policies are deferred and recognized over the life of the
contract based on industry experience. As the Group grows, it expects that
third-party sales will constitute the larger percentage of service policy sales.
Gross dollar sales (aggregate consumer's retail purchase price) from all
service policy programs were 3.8 percent of total sales in fiscal 1996 compared
to 3.3 percent and 3.5 percent in fiscal 1995 and 1994, respectively. Total
service policy revenue, which is reported in total sales, was 1.4 percent of
total sales in fiscal 1996 compared to 0.5 percent and 0.1 percent in fiscal
1995 and 1994, respectively. Third party service policy revenues were 1.3
percent of total sales in fiscal 1996 compared to 0.4 percent in fiscal 1995.
IMPACT OF INFLATION. Management expects that increases in vehicle pricing
would have a positive impact on CarMax's sales and earnings. However, increased
interest rates, including rates associated with consumer installment credit,
could have a negative impact on sales and earnings.
VII-17
<PAGE>
GROSS PROFIT
The CarMax marketing concept includes a strong commitment to providing a
high level of consumer value. The CarMax strategy is to price vehicles at or
below the best negotiated price in the market. As a result, CarMax operates with
lower gross profit margins than industry averages for used-vehicle dealerships.
The gross profit margin was 8.6 percent in fiscal 1996, 6.3 percent in fiscal
1995 and 12.2 percent in fiscal 1994. Improved inventory management, including
optimizing each store's vehicle mix and display based on local market demand,
contributed to the margin increase in fiscal 1996. The fiscal 1994 margin
reflects results from the Group's first location, which operated for the last
five months of the fiscal year. Pricing adjustments made during the early stages
of operation reduced the gross margin from fiscal 1994 to fiscal 1995 but also
produced higher per store sales volumes. Cost of sales includes the cost of
vehicles, reconditioning costs, transportation and other purchasing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
CarMax's consumer value marketing concept produces average store volumes
significantly higher than industry averages. As a result, selling, general and
administrative expenses are expected to be relatively lower as a percentage of
sales. Over the past three years, the expense to sales ratio has declined as
sales from additional locations and comparable store sales growth have leveraged
expenses, including start-up costs and Group overhead expenses. Selling, general
and administrative expenses were 10.3 percent of sales in fiscal 1996, 14.0
percent in fiscal 1995 and 30.0 percent in fiscal 1994.
Operating profits generated by the CarMax Group's installment lending
division, First North American Credit, and fees received for arranging financing
through third parties are recorded as a reduction to selling, general and
administrative expenses.
INTEREST EXPENSE
Interest expense was 1.5 percent of sales in fiscal 1996, 1.4 percent in
fiscal 1995, and 1.0 percent in fiscal 1994. Interest expense is incurred on
allocated debt used primarily for store expansion and inventory and receivables
growth.
INCOME TAXES
The Group's effective income tax rate was 41.5 percent in fiscal 1996, 41.2
percent in fiscal 1995 and 40.8 percent in fiscal 1994. The CarMax Group
generated losses in all reported periods, and as a result has recorded related
income tax benefits. Compared to the Circuit City Group, this Group experienced
relatively higher state income tax rates due to the fact that as members of the
consolidated group for state tax purposes the CarMax Group is subject to income
tax in states in which it presently does not conduct business. The resulting
high tax rate is expected to decline as the Group expands geographically into
additional states.
NET LOSS
Management anticipated that CarMax would produce a loss in its initial
growth stage. The pre-tax loss totaled $8.9 million in fiscal 1996, $7.0 million
in fiscal 1995 and $3.0 million in fiscal 1994. After-tax losses totalled $5.2
million in fiscal 1996, $4.1 million in fiscal 1995 and $1.8 million in fiscal
1994. Although the Group has produced losses as expected, all stores open as of
August 31, 1996, are currently producing an operating profit including profits
from vehicle financing but before the allocation of Group overhead expenses.
OPERATIONS OUTLOOK
The Group expects to enter 45 of the nation's top 50 markets, reaching a
total store count of 80 to 90 locations by fiscal 2002. The expansion plans
include two additional stores in the current fiscal year, eight to 10 stores
next fiscal year and 15 to 20 openings per year thereafter. The Group also will
continue to explore opportunities in new-car retailing. In less than five months
of operation, the Chrysler franchise location surpassed the annual planning
volume established by Chrysler. As a result, the Group intends to pursue new car
franchises by acquisition of existing franchises and franchise grants from
automobile manufacturers. The Group currently provides a full range of repair
service on all new vehicles and limited service on used vehicles. The Group
plans on expanding its retail repair service offering in all of its locations
during fiscal 1998.
CarMax expects to produce a higher loss in fiscal 1997 versus fiscal 1996
due to the increased costs from acceleration of Group overhead and other
infrastructure to support its accelerated roll-out plan as well as adjustments
to existing locations to incorporate operating enhancements. The Group expects
to generate results in fiscal 1998 similar to those in fiscal 1997 and to
generate profits by fiscal year 1999.
VII-18
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Accumulated Group deficits at February 29, 1996, and August 31, 1996,
totalled $11.2 million and $11.8 million, respectively. The Group has funded
such deficits and the expansion of the store base and installment loan portfolio
through a combination of allocated external debt, sale leaseback transactions
and receivables securitizations. The Group continues to work towards obtaining a
cost effective securitization of automobile inventory.
In fiscal 1996, net cash provided by operating activities was $16.1 million
compared with $68.0 million used in operating activities in fiscal 1995 and
$20.0 million used in operating activities in fiscal 1994. The fiscal 1996 cash
increase principally reflects a decrease in net accounts receivable due to the
sale of installment loan receivables through securitizations, as described
below, and a more limited growth of inventory in relation to sales growth. The
increase in cash used in operating activities in fiscal 1995 reflects an
increase in installment loan receivables generated by existing and new stores
and an increase in inventory to support new store openings.
Net cash used in operating activities was $1.9 million for the six months
ended August 31, 1996, reflecting a use of cash to fund an additional $9.1
million in accounts receivable, which was partially offset by a $5.1 million
increase in accounts payable, accrued expenses and other current liabilities.
For the six months ended August 31, 1995, the $40.0 million increase in
cash provided by operating activities was largely the result of a $24.5 million
decrease in accounts receivable from an initial securitization transaction and a
$19.2 million increase in accounts payable, accrued expenses and other current
liabilities.
The auto loan securitization program was started in fiscal 1996 with
securitized receivables totalling $87.0 million at February 29, 1996. At August
31, 1996, securitized receivables totalled $121.0 million. Under the
securitization program, receivables are sold to an unaffiliated third party with
the servicing benefit retained. The Group expects that the existing
securitization programs can be increased to accommodate receivables growth as
CarMax grows.
The CarMax Group's capital expenditures were $26.8 million in fiscal 1996,
$33.0 million in fiscal 1995 and $7.3 million in fiscal 1994. The Group
anticipates capital expenditures for fiscal 1997 to aggregate approximately $185
million. Capital expenditures for the first six months of fiscal 1997 were $25.8
million. Most of CarMax's capital expenditures through the second quarter of
fiscal 1997 related to the opening of its five existing stores, its
reconditioning center and stores scheduled to open over the following 12 months.
Capital expenditures for the balance of fiscal 1997 will consist primarily of
expenditures for the remaining fiscal 1997 store openings and store openings in
fiscal 1998.
The Group relies on the Company's allocated external debt to fund operating
deficits and to provide working capital needed to fund net assets not otherwise
disposed of through sale-leasebacks or receivable securitizations. All
significant financial activities of the Group are managed by the Company on a
centralized basis and are dependent on the financial condition of the Company.
Such financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
The Company anticipates that the proceeds of the CarMax Stock Proposal,
proceeds from the sales of property and equipment and receivables, and increases
in the Company's debt allocated to the CarMax Group, together with cash
generated by operations, will be sufficient to fund CarMax Group's capital
expenditures and operations through the expansion period.
RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF FISCAL 1997 VERSUS FIRST SIX MONTHS
OF FISCAL 1996
SALES GROWTH
Total sales increased 101 percent to $256.9 million in the first six months
of fiscal 1997 compared to $127.6 million in the first six months of fiscal
1996. The sales growth primarily reflects the addition of new stores, and the
addition of the Chrysler franchise at one of the Atlanta, Georgia, stores, as
well as a 21 percent increase in comparable store sales.
Gross dollar sales from all service policies were 3.6 percent of total
sales in the first six months of fiscal 1997 compared with 3.7 percent in the
first six months of fiscal 1996. The decline in service policy revenues reflects
the addition of the Chrysler franchise resulting in lower penetration due to
manufacturer's warranty coverage. Total service policy revenues, which are
reported in total sales, were 1.2 percent of total sales in the first six months
of fiscal 1997 compared to 1.3 percent in the first six months of fiscal 1996.
Third-party service policy revenues were 1.1 percent of total sales in the first
six months of fiscal 1997 compared to 1.2 percent in the first six months of
fiscal 1996.
VII-19
<PAGE>
SEASONALITY
CarMax Group sales are subject to seasonal influences. Generally the Group
experiences more of its net sales in the first half of the fiscal year.
Therefore, interim results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
GROSS PROFIT
Gross profit as a percentage of sales was 9.0 percent in the first six
months of fiscal 1997 compared to 8.9 percent for the first six months of fiscal
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of
sales to 8.5 percent of sales in the first six months of fiscal 1997 compared to
10.2 percent of sales in the first six months of fiscal 1996. This decrease was
primarily attributable to the leveraging of Group overhead due to the increase
in sales from new stores, the addition of the Chrysler franchise, comparable
store sales growth at existing stores, as well as an increase in FNAC's
servicing revenue.
INTEREST EXPENSE
Interest expense was 0.9 percent of sales in the first six months of fiscal
1997 compared to 1.5 percent in the first six months of fiscal 1996. The
decrease in interest expense as a percentage of sales reflects the
securitization of the Group's installment receivables and the improved level of
inventory per store.
INCOME TAXES
The Group's effective tax rate was 41.5 percent for the six month period
ended August 31,1996, and 41.2 percent for the six months ended August 31,1995.
NET LOSS
The Group's net loss for the first six months of fiscal 1997 decreased to
$0.6 million compared with a loss of $2.1 million for the first six months of
fiscal 1996. The improvement was primarily attributable to improved leverage in
selling, general and administrative expenses and an increase in FNAC's servicing
revenue.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and shall be
applied prospectively. The Group does not expect the standard to have a material
impact on the Group's financial position or results of operations.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains forward-looking statements
regarding the CarMax Group. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed in the Company's
1996 Annual Report on Form 10-K. See "Cautionary Statement Regarding
Forward-Looking Statements" in the Proxy Statement.
VII-20
<PAGE>
CARMAX GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
---------------------------------------------------------
1996 % 1995 % 1994 %
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
NET SALES AND OPERATING REVENUES.................................. $275,857 100.0 $77,002 100.0 $16,176 100.0
Cost of sales..................................................... 252,284 91.4 72,147 93.7 14,202 87.8
-------- ----- ------- ----- ------- -----
GROSS PROFIT...................................................... 23,573 8.6 4,855 6.3 1,974 12.2
-------- ----- ------- ----- ------- -----
Selling, general and administrative expenses (Notes 3 and 12)..... 28,440 10.3 10,792 14.0 4,849 30.0
Interest expense (Note 7)......................................... 4,075 1.5 1,045 1.4 161 1.0
-------- ----- ------- ----- ------- -----
TOTAL EXPENSES.................................................... 32,515 11.8 11,837 15.4 5,010 31.0
-------- ----- ------- ----- ------- -----
Loss before income tax benefit.................................... 8,942 3.2 6,982 9.1 3,036 18.8
Income tax benefit (Notes 3 and 8)................................ 3,707 1.3 2,875 3.8 1,239 7.7
-------- ----- ------- ----- ------- -----
NET LOSS.......................................................... $ 5,235 1.9 $ 4,107 5.3 $ 1,797 11.1
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----
</TABLE>
See accompanying notes to group financial statements.
VII-21
<PAGE>
CARMAX GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
AT FEBRUARY 29 OR 28
--------------------
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash................................................................................................ $ 2,219 $ 2,159
Net accounts receivable (Note 4).................................................................... 16,562 44,326
Inventory........................................................................................... 61,672 46,471
Prepaid expenses and other current assets........................................................... 772 589
-------- --------
TOTAL CURRENT ASSETS............................................................................. 81,225 93,545
Property and equipment, net (Notes 6 and 7)......................................................... 19,860 19,655
Deferred income taxes (Note 8)...................................................................... 1,560 1,093
-------- --------
TOTAL ASSETS..................................................................................... $102,645 $114,293
-------- --------
-------- --------
LIABILITIES AND ACCUMULATED GROUP DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................................................................... $ 12,399 $ 6,476
Short-term debt (Note 7)............................................................................ 18,050 --
Deferred income taxes (Note 8)...................................................................... 2,276 699
Accrued expenses and other current liabilities...................................................... 1,164 756
-------- --------
TOTAL CURRENT LIABILITIES........................................................................ 33,889 7,931
Long-term debt (Note 7)............................................................................. 78,519 111,629
Deferred revenue and other liabilities.............................................................. 1,438 699
-------- --------
TOTAL LIABILITIES................................................................................ 113,846 120,259
-------- --------
ACCUMULATED GROUP DEFICIT............................................................................. (11,201) (5,966)
-------- --------
Commitments and contingent liabilities (Notes 1, 4, 5, 10, 11, 13 and 14)
TOTAL LIABILITIES AND ACCUMULATED GROUP DEFICIT.................................................. $102,645 $114,293
-------- --------
-------- --------
</TABLE>
See accompanying notes to group financial statements.
VII-22
<PAGE>
CARMAX GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss................................................................................. $ (5,235) $ (4,107) $ (1,797)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation.......................................................................... 821 259 60
Provision for deferred income taxes................................................... 1,110 412 (805)
Increase in deferred revenue and other liabilities.................................... 739 608 91
Decrease (increase) in net accounts receivable........................................ 27,764 (34,001) (8,871)
Increase in inventory, prepaid expenses and other current assets...................... (15,384) (35,720) (11,341)
Increase in accounts payable, accrued expenses and other current liabilities.......... 6,331 4,540 2,679
-------- -------- --------
Net cash provided by (used in) operating activities...................................... 16,146 (68,009) (19,984)
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment...................................................... (26,776) (32,990) (7,284)
Proceeds from sales of property and equipment............................................ 25,750 14,300 6,000
-------- -------- --------
Net cash used in investing activities.................................................... (1,026) (18,690) (1,284)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net........................................... 18,050 -- --
(Principal payments on) proceeds from issuance of long-term debt, net.................... (33,110) 87,253 22,825
-------- -------- --------
Net cash (used in) provided by financing activities...................................... (15,060) 87,253 22,825
-------- -------- --------
Increase in cash........................................................................... 60 554 1,557
Cash at beginning of year.................................................................. 2,159 1,605 48
-------- -------- --------
Cash at end of year........................................................................ $ 2,219 $ 2,159 $ 1,605
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to group financial statements.
VII-23
<PAGE>
CARMAX GROUP
STATEMENTS OF ACCUMULATED GROUP DEFICIT
<TABLE>
<CAPTION>
ACCUMULATED
GROUP DEFICIT
----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
BALANCE AT MARCH 1, 1993............................................................................... $ (62)
Net loss............................................................................................... (1,797)
----------
BALANCE AT FEBRUARY 28, 1994........................................................................... (1,859)
Net loss............................................................................................... (4,107)
----------
BALANCE AT FEBRUARY 28, 1995........................................................................... (5,966)
Net loss............................................................................................... (5,235)
----------
BALANCE AT FEBRUARY 29, 1996........................................................................... $(11,201)
----------
----------
</TABLE>
See accompanying notes to group financial statements.
VII-24
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Board of Directors of Circuit City Stores, Inc. (the "Company") has
adopted a proposal (the "CarMax Stock Proposal") which, if approved by
shareholders and implemented by the Board of Directors, would effect a
comprehensive plan that will result in a restructuring of the existing Common
Stock of the Company into two new series of Common Stock intended to reflect
separately the performance of the Company's two main businesses -- the used- and
new-car retail business (the "CarMax Group") and the consumer electronics and
appliances retail business, including its interest in the CarMax Group referred
to below (the "Circuit City Group"). Under the CarMax Stock Proposal, the Board
of Directors would be authorized to designate and issue shares of a new series
of Common Stock to be called Circuit City Stores, Inc. -- CarMax Group Common
Stock, par value $0.50 per share ("CarMax Stock"), which is intended to reflect
separately the performance of the CarMax Group. In addition, each share of the
Company's existing Common Stock would be redesignated as a share of a new series
of Common Stock to be called Circuit City Stores, Inc. -- Circuit City Group
Common Stock, par value $0.50 per share ("Circuit City Stock"), which is
intended to reflect separately the performance of the Circuit City Group, which
is generally comprised of (i) the Company's consumer electronics and appliances
retail business, (ii) an interest in the CarMax Group, which excludes the
interest represented by any outstanding shares of CarMax Stock, as described
below, and (iii) all other businesses in which the Company or any of its
subsidiaries may be engaged (other than those comprising the CarMax Group). The
CarMax Group and the Circuit City Group are sometimes referred to collectively
as the "Groups" and individually as a "Group."
Following approval of the CarMax Stock Proposal, the Company currently
intends, subject to prevailing market and other conditions, to offer shares of
CarMax Stock initially representing 15 percent to 20 percent of the equity value
of the CarMax Group to the public for cash in a public offering (the
"Offering"). The Company intends to allocate the proceeds of the Offering to the
CarMax Group. Upon completion of the Offering, the Circuit City Group will hold
an interest (the "Inter-Group Interest") in 80 percent to 85 percent of the
equity value of the CarMax Group.
The CarMax Group and the Circuit City Group financial statements comprise
all of the accounts included in the corresponding consolidated financial
statements of the Company. The separate Group financial statements give effect
to the management and allocation policies adopted by the Board of Directors, as
described under "Corporate Activities" below. The CarMax Group financial
statements have been prepared on a basis that management believes to be
reasonable and appropriate and include (i) the historical financial position,
results of operations and cash flows of the CarMax Group, (ii) an allocated
portion of the Company's debt, including the related effects upon results of
operations and cash flow and (iii) an allocated portion of the Company's
corporate general and administrative costs.
If the CarMax Stock Proposal is approved and implemented, the Company will
provide to holders of both CarMax Stock and Circuit City Stock separate
financial statements, management's discussion and analysis of results of
operations and financial condition, description of business and other relevant
information for the CarMax Group, the Circuit City Group and the Company.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the CarMax
Group and the Circuit City Group for the purposes of preparing their respective
financial statements, holders of CarMax Stock and holders of Circuit City Stock
will be shareholders of the Company and will continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company contemplated by the CarMax Stock Proposal will
not affect title to the assets or responsibility for the liabilities of the
Company or any of its subsidiaries. As a result, the CarMax Stock Proposal will
not affect the rights of holders of the Company's or any of its subsidiaries'
debt. The results of operations or financial condition of either Group could
affect the results of operations or financial condition of the other Group and
the market price of the series of Common Stock relating to that Group. In
addition, any net losses of the CarMax Group or the Circuit City Group and
dividends or distributions on, or repurchases of, CarMax Stock or Circuit City
Stock will reduce the assets of the Company legally available for payment of
dividends on both the CarMax Stock and the Circuit City Stock. Accordingly, the
CarMax Group's financial information should be read in conjunction with the
Company's consolidated financial information and the Circuit City Group's
financial information.
The management and allocation policies applicable to the preparation of the
financial statements of the CarMax Group and the Circuit City Group may be
modified or rescinded, or additional policies may be adopted, at the sole
discretion of the
VII-25
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
1. BASIS OF PRESENTATION -- Continued
Board of Directors without approval of the shareholders, although the Board of
Directors has no present plans to do so. Any determination of the Board of
Directors to modify or rescind such policies, or to adopt additional policies,
including any such decision that would have disparate effects upon holders of
CarMax Stock and holders of Circuit City Stock, would be made by the Board of
Directors in its good faith business judgment of the Company's best interests,
taking into consideration the interests of all common shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) INSTALLMENT AUTO LOAN RECEIVABLES
Installment auto loan receivables ("installment receivables") held for
investment are stated at cost. Installment receivables held for sale are stated
at the lower of cost or market. As of February 29, 1996, and February 28, 1995,
cost approximates market.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company enters into financial instruments on behalf of the CarMax
Group. The carrying value of the CarMax Group's financial instruments, excluding
interest rate swap agreements ("swaps"), approximates fair value due to variable
interest rates on long-term debt and the short-term maturities of the assets and
other liabilities. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. Credit risk is mitigated by dealing
only with counterparties that are highly rated by several financial rating
agencies. Accordingly, the CarMax Group does not anticipate loss for
nonperformance. All financial instruments are diversified along industry,
product and geographic areas. As discussed in Note 5, swaps are not held for
trading purposes and, therefore, are not carried at fair value.
(C) INVENTORY
Inventory is stated at the lower of cost or market. Vehicle inventory cost
is determined by specific identification. Parts and labor used to recondition
vehicles, as well as transportation and other incremental expenses associated
with acquiring vehicles, are included in inventory.
(D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the assets'
estimated useful lives, which range from three to 15 years.
(E) PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are deferred and
amortized ratably over the period from the date of the store opening to the end
of the fiscal year.
(F) INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred
income taxes reflect the impact of temporary differences between the amounts of
assets and liabilities recognized for financial reporting purposes and the
amounts recognized for income tax purposes, measured by applying currently
enacted tax laws. A deferred tax asset is recognized if it is more likely than
not that a benefit will be realized.
(G) DEFERRED REVENUE
The CarMax Group sells its own service policies and service policies on
behalf of unrelated third parties. Policies usually have terms of coverage
between 12 and 72 months. All revenue from the sale of the CarMax Group's own
service policies is deferred and amortized over the life of the policies
consistent with the pattern of repair experience of the industry. Incremental
direct contract costs related to the sale of policies are deferred and charged
to expense in proportion to the
VII-26
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
revenue recognized. All other costs are charged to expense as incurred.
Commission revenue for the unrelated third-party service policies is recognized
at the time of sale.
(H) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating profits generated by FNAC are recorded as a reduction to selling,
general and administrative expenses.
(I) ADVERTISING EXPENSES
All advertising costs are expensed as incurred.
(J) EARNINGS OR LOSS PER SHARE
Historical loss per share is omitted from the statements of operations
since the CarMax Stock was not part of the capital structure of the Company for
the periods presented. Following implementation of the CarMax Stock Proposal,
the method of calculating earnings per share for the CarMax Group would reflect
the terms of the proposed amendments to the Company's Amended and Restated
Articles of Incorporation and would be computed by dividing the product of (i)
earnings or losses of the CarMax Group and (ii) the "Outstanding CarMax
Fraction" by the weighted average number of shares of CarMax Stock and dilutive
CarMax Stock equivalents outstanding during the applicable period. The
"Outstanding CarMax Fraction" is the fractional interest in earnings or losses
of the CarMax Group and the equity of the CarMax Group that is represented by
the shares of CarMax Stock that are outstanding at any particular time, and is
equal to a fraction the numerator of which is such number of shares of CarMax
Stock outstanding and the denominator of which is the number of shares of CarMax
Stock that, if issued, would represent 100 percent of the equity of the CarMax
Group.
(K) RISKS AND UNCERTAINTIES
The diversity of the CarMax Group's customers and suppliers reduces the
risk that a severe impact will occur in the near term as a result of changes in
its customer base, competition or sources of supply. The CarMax Group operations
currently are concentrated in the southeastern United States. A severe economic
downturn in the southeastern United States could negatively impact the CarMax
Group's operating results. Due to the CarMax Group's geographic concentration
and limited overall size, management cannot assure that unanticipated events
will not have a negative impact on the Group.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(L) RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
classifications adopted in fiscal 1996.
3. CORPORATE ACTIVITIES
The CarMax Group's financial statements reflect the application of the
management and allocation policies adopted by the Board of Directors to various
corporate activities, as described below.
(A) FINANCIAL ACTIVITIES
Most financial activities are managed by the Company on a centralized
basis. Such financial activities include the investment of surplus cash and the
issuance and repayment of short-term and long-term debt.
(B) DEBT AND INTEREST EXPENSE
Allocated debt of the CarMax Group consists of (i) Company debt, if any,
that has been allocated in its entirety to the CarMax Group and (ii) a portion
of the Company's debt that is allocated between the Circuit City Group and the
CarMax Group ("pooled debt"). For the periods covered by the CarMax Group's
financial statements, all debt consists of an allocated portion of the pooled
debt. The pooled debt bears interest at a rate based on the weighted average
interest rate of such debt
VII-27
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
3. CORPORATE ACTIVITIES -- Continued
calculated on a periodic basis and applied to the average pooled debt balance.
Expenses related to increases in pooled debt are reflected in the weighted
average interest rate of such pooled debt as a whole.
(C) CORPORATE GENERAL AND ADMINISTRATIVE COSTS
Corporate general and administrative costs and other shared services
generally have been allocated to the CarMax Group based upon utilization of such
services by the CarMax Group. Where determinations based on utilization alone
have been impracticable, other methods and criteria were used that management
believes are equitable and provide a reasonable estimate of the cost
attributable to the CarMax Group.
(D) INCOME TAXES
The CarMax Group is included in the consolidated federal income tax return
filed by the Company. Accordingly, the provision for federal income taxes and
related payments of tax are determined on a consolidated basis. The financial
statement provision and the related tax payments or refunds are reflected in the
Circuit City Group's and the CarMax Group's financial statements in accordance
with the Company's tax allocation policy for such Groups. In general, this
policy provides that the consolidated tax provision and related tax payments or
refunds will be allocated between the Circuit City Group and the CarMax Group
based principally upon the financial income, taxable income, credits and other
amounts directly related to the respective Group. Tax benefits that cannot be
used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits. As
a result, the allocated group amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if the Groups had filed
separate tax returns.
4. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS
Accounts receivable consist of the following at February 29 or 28:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Trade receivables.......................................... $ 4,001 $ 340
Installment receivables held for sale...................... 6,941 44,292
Installment receivables held for investment................ 6,065 --
------- -------
17,007 44,632
Less allowance for doubtful accounts....................... 445 306
------- -------
Net accounts receivable.................................... $16,562 $44,326
------- -------
------- -------
</TABLE>
In fiscal 1996, the Company entered into a securitization transaction on
behalf of the CarMax Group to finance the installment receivables generated by
First North American Credit ("FNAC,") the Group's installment lending division.
No gain or loss has been recorded on this sale. Proceeds from the auto loan
securitization transaction were $87 million during fiscal 1996. At February 29,
1996, the following amounts were outstanding:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables...................................................... $ 93,065
Interest retained by CarMax Group............................................ (6,065)
-----------
Net receivables transferred with recourse.................................... $ 87,000
-----------
-----------
Program capacity............................................................. $ 100,000
-----------
-----------
</TABLE>
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. The securitization agreement
provides recourse to the Company for any cash flow deficiencies if the monthly
auto loan installment cash flows from finance charges are inadequate to cover
such expenses. The CarMax Group believes that as of February 29, 1996, no
liability existed under the recourse provision. As of April 1, 1996, the program
capacity increased to $125
VII-28
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
4. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS -- Continued
million. FNAC's servicing revenue totalled $2.0 million for fiscal 1996, $2.0
million for fiscal 1995 and $0.4 million for fiscal 1994.
5. INTEREST RATE SWAP
In November 1995, the Company entered into a 50-month amortizing swap on
behalf of the CarMax Group in the notional amount of $75 million relating to the
auto loan receivable securitization to convert variable-rate financing costs to
a fixed-rate obligation. The underlying receivables are issued with a fixed-rate
finance charge. The swap was put in place to better match the variable funding
costs to the receivables being securitized and to preserve net portfolio yield.
Recording the swap at fair value at February 29, 1996, would result in a loss of
$0.3 million.
The market and credit risks associated with this swap are similar to those
relating to other types of financial instruments. Market risk is the exposure
created by potential fluctuations in interest rates and is directly related to
the product type, agreement terms and transaction volume. The CarMax Group does
not anticipate significant market risk from swaps, since their use is to more
closely match funding costs to the use of the funding. Credit risk is the
exposure created by potential nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated counterparties.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Land....................................................... $ 3,826 $ --
Construction in progress................................... 9,190 17,114
Furniture, fixtures and equipment (3 to 8 years)........... 5,515 2,173
Leasehold improvements (10 to 15 years).................... 2,461 682
------- -------
20,992 19,969
Less accumulated depreciation.............................. 1,132 314
------- -------
Property and equipment, net................................ $19,860 $19,655
------- -------
------- -------
</TABLE>
7. DEBT
Long-term pooled debt of the Company at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Term loans........................................................ $275,000 $100,000
Short-term debt expected to be refinanced......................... 100,000 53,000
-------- --------
Total long-term debt.............................................. $375,000 $153,000
-------- --------
-------- --------
Portion of long-term debt allocated to CarMax Group............... $ 78,519 $111,629
-------- --------
-------- --------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. Principal is due in full at maturity with interest
payable periodically at LIBOR plus 0.50 percent. At February 29, 1996, the
interest rate on the term loan was 5.88 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 1996, the interest rate
on the term loan was 5.65 percent.
The Company has the intent and ability to refinance the $100,000,000 of
short-term committed and uncommitted bank borrowings on a long-term basis by
entering into a multi-year term loan with a group of banks. Consequently, the
Company
VII-29
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
7. DEBT -- Continued
has classified the short-term debt as long-term for financial reporting
purposes. The existing revolving credit agreement could be used for this
purpose, although the Company does not currently intend to do so.
The Company maintains a multi-year, $100,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on
certain money market rates and a commitment fee of 0.13 percent per annum. The
agreement was entered into as of June 30, 1992, was amended and restated as of
June 30, 1995, and terminates June 30, 2000. The agreement provides for annual
one-year extensions of the final maturity beginning on or before June 30, 1996,
and each June 30 thereafter. No amounts were outstanding under the revolving
credit agreement at February 29, 1996, or February 28, 1995.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 29, 1996, and February 28, 1995.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Average short-term debt outstanding.................. $185,789 $134,022 $ 77,392
-------- -------- --------
Maximum short-term debt outstanding.................. $479,000 $465,000 $355,000
-------- -------- --------
-------- -------- --------
Aggregate committed lines of credit.................. $255,000 $285,000 $145,000
-------- -------- --------
-------- -------- --------
</TABLE>
Short-term debt allocated to the CarMax Group at February 29, 1996, was
$18,050,000. The weighted average interest rate on the outstanding short-term
debt was 5.9 percent during fiscal 1996, 5.3 percent during fiscal 1995 and 3.3
percent during fiscal 1994.
Interest expense allocated by the Company to the CarMax Group, excluding
interest capitalized, was $4,074,737, $1,045,153 and $161,472 in fiscal 1996,
1995 and 1994, respectively.
The CarMax Group capitalizes interest in connection with the construction
of certain facilities. In fiscal 1996, interest capitalized amounted to
$1,314,000 ($176,000 and $119,000 in fiscal 1995 and 1994, respectively).
Concurrent with the funding of the $175,000,000 term loan facility in May
1995, the Company entered into five-year swaps with notional amounts aggregating
$175,000,000. These swaps effectively converted the variable-rate obligation
into a fixed-rate obligation. The fair value of the swaps is the amount at which
they could be settled. This value is based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, would result
in a loss of $2,500,000.
VII-30
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
8. INCOME TAXES
The components of the income tax benefit on loss before income tax benefit
follow:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Current:
Federal............................................................. $(3,670) $(2,536) $ (341)
State............................................................... (1,147) (751) (93)
------- ------- -------
(4,817) (3,287) (434)
------- ------- -------
Deferred:
Federal............................................................. 844 316 (631)
State............................................................... 266 96 (174)
------- ------- -------
1,110 412 (805)
------- ------- -------
Income tax benefit.................................................... $(3,707) $(2,875) $(1,239)
------- ------- -------
------- ------- -------
</TABLE>
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate............................................ 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit......................... 6.5 6.2 5.8
---- ---- ----
Effective income tax rate.................................................... 41.5% 41.2% 40.8%
---- ---- ----
---- ---- ----
</TABLE>
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 29, 1996, and February 28, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue............................................ $1,820 $ 990
Organization cost capitalization............................ 92 182
Accrued expenses............................................ -- 86
Other....................................................... -- 3
------ ------
Total gross deferred tax assets.......................... 1,912 1,261
------ ------
Deferred Tax Liabilities:
Depreciation................................................ 352 168
Prepaid expenses............................................ 365 257
Inventory capitalization.................................... 1,907 442
Other....................................................... 4 --
------ ------
Total gross deferred tax liabilities..................... 2,628 867
------ ------
Net deferred tax (liability) asset............................ $ (716) $ 394
------ ------
------ ------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies. Based on these considerations, management
believes that it is more likely than not that the gross deferred tax assets at
February 29, 1996, and February 28, 1995, will be realized by the CarMax Group;
therefore, no valuation allowance is necessary.
VII-31
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
9. STOCK INCENTIVE PLAN
As of February 29, 1996, there were outstanding options to purchase shares
of stock representing approximately 5% of the corporate entity comprising the
CarMax Group. These options are held by management and key employees of the
CarMax Group and vest evenly on the third, fourth, and fifth anniversary of the
grant date. The exercise price is equal to, or greater than, the fair market
value of the stock at the date of grant.
If the CarMax Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, management intends to convert these
options into options to purchase CarMax Group stock. While the issuance of
additional shares will reduce the ownership percentage, the aggregate intrinsic
value of the options will be preserved. In addition, the vesting provisions and
option periods of the original grant will remain the same when converted.
10. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of the program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of the
Company's common stock at February 29, 1996, and February 28, 1995.
Eligible employees of the CarMax Group participate in the Company's plan.
Pension costs for these employees have been allocated to the CarMax Group based
on its proportionate share of the projected benefit obligation.
The components of net pension expense for the CarMax Group are as follows
(pension activity related to fiscal 1994 was not material):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29 OR 28
-------------------
1996 1995
---- ----
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Service cost of benefits earned during the year................... $140 $34
Interest cost on projected benefit obligation..................... 26 5
Actual return on plan assets...................................... (128) (1)
Net amortization.................................................. 87 (18)
---- ----
Net pension expense............................................... $125 $20
---- ----
---- ----
</TABLE>
VII-32
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
10. PENSION PLAN -- Continued
The following table sets forth the CarMax Group's share of the plan's
financial status and amounts recognized in the balance sheets as of February 29
or 28:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested........................................................ $ 242 $ 45
Non-vested.................................................... 32 7
----- -----
Total benefits.................................................. 274 52
Additional amounts related to projected
salary increases.............................................. 215 41
----- -----
Projected benefit obligation for services
rendered to date.............................................. 489 93
Plan assets at fair value....................................... (649) (194)
----- -----
Plan assets in excess of projected
benefit obligation............................................ (160) (101)
Unrecognized loss from past experience.......................... (195) (43)
Unrecognized prior service cost................................. 12 5
Unrecognized net obligation being
recognized over 15 years...................................... 17 7
----- -----
Prepaid pension cost............................................ $(326) $(132)
----- -----
----- -----
</TABLE>
Assumptions used in the accounting for the pension plan were:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29 OR 28
-----------------
1996 1995
---- ----
<S> <C> <C>
Weighted average discount rate........................................ 7.0 % 8.0 %
Rate of increase in compensation levels............................... 6.0 % 6.5 %
Rate of return on plan assets......................................... 9.0 % 8.0 %
---- ----
</TABLE>
11. LEASE COMMITMENTS
The CarMax Group conducts substantially all of its business in leased
premises. The CarMax Group's lease obligations are based upon contractual
minimum rates. Rental expenses for all operating leases were $3,850,000,
$1,030,000 and $189,000 in fiscal 1996, 1995 and 1994, respectively.
Most leases provide that the CarMax Group pay taxes, maintenance, insurance
and certain other operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of from eight years to 28 years at terms substantially the same as the
initial terms.
VII-33
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
11. LEASE COMMITMENTS -- Continued
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the CarMax Group, as of February 29, 1996, were:
<TABLE>
<CAPTION>
OPERATING LEASE
FISCAL COMMITMENTS
- ------------------------------------------------------------------- ----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
1997............................................................... $ 4,864
1998............................................................... 4,823
1999............................................................... 4,821
2000............................................................... 4,696
2001............................................................... 4,657
After 2001......................................................... 70,551
----------
Total minimum lease payments....................................... $ 94,412
----------
----------
</TABLE>
In fiscal 1996, the Company entered into sale-leaseback transactions on
behalf of the CarMax Group with unrelated parties at an aggregate selling price
of $25,750,000 ($14,300,000 in fiscal 1995 and $6,000,000 in fiscal 1994).
Neither the Company nor the CarMax Group has continuing involvement under the
sale-leaseback transactions.
12. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying statements of operations, amounted
to $7,154,000, $2,202,000 and $703,000 (2.6 percent, 2.9 percent and 4.3 percent
of net sales and operating revenues) in fiscal years 1996, 1995 and 1994,
respectively.
13. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the CarMax Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operation.
14. SUBSEQUENT EVENT
In April 1996, OfficeMax, Inc. filed suit accusing the Company of
infringing OfficeMax, Inc.'s trademark rights by using the mark CARMAX. The
Company denies such allegations and believes that the CarMax Group's use and
registration of the mark CARMAX and other marks containing MAX do not violate
any rights of OfficeMax, Inc. The Company has filed a complaint requesting,
among other things, that certain of OfficeMax, Inc.'s marks be cancelled or
declared void. A trial on these matters has been set for December 2, 1996.
Although it is not possible to predict the outcome of this litigation, the
Company believes that OfficeMax, Inc.'s position and suit are without merit.
VII-34
<PAGE>
CARMAX GROUP
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CIRCUIT CITY STORES, INC.:
We have audited the accompanying balance sheets of the CarMax Group (as
defined in Note 1) as of February 29, 1996 and February 28, 1995 and the related
statements of operations, accumulated group deficit and cash flows for each of
the fiscal years in the three-year period ended February 29, 1996. These
financial statements are the responsibility of Circuit City Stores, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the CarMax Group as of
February 29, 1996 and February 28, 1995 and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
February 29, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- -----------------------------
Richmond, Virginia
October 25, 1996
VII-35
<PAGE>
CARMAX GROUP
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
---------------------------------------
<S> <C> <C> <C> <C>
1996 % 1995 %
--------- ------ --------- ------
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
NET SALES AND OPERATING REVENUES.................................................... $ 256,910 100.0 $ 127,634 100.0
Cost of sales....................................................................... 233,844 91.0 116,223 91.1
--------- ------ --------- ------
GROSS PROFIT........................................................................ 23,066 9.0 11,411 8.9
--------- ------ --------- ------
Selling, general and administrative expenses........................................ 21,834 8.5 13,083 10.2
Interest expense.................................................................... 2,275 0.9 1,912 1.5
--------- ------ --------- ------
TOTAL EXPENSES...................................................................... 24,109 9.4 14,995 11.7
--------- ------ --------- ------
Loss before income tax benefit...................................................... 1,043 0.4 3,584 2.8
Income tax benefit.................................................................. 433 0.2 1,475 1.1
--------- ------ --------- ------
NET LOSS............................................................................ $ 610 0.2 $ 2,109 1.7
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
See accompanying notes to group financial statements.
VII-36
<PAGE>
CARMAX GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
AUG. 31, 1996 FEB. 29, 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash........................................................................................... $ 5,856 $ 2,219
Net accounts receivable........................................................................ 25,668 16,562
Inventory...................................................................................... 58,611 61,672
Prepaid expenses and other current assets...................................................... 1,730 772
------------- -------------
TOTAL CURRENT ASSETS........................................................................ 91,865 81,225
Property and equipment, net.................................................................... 41,117 19,860
Deferred income taxes.......................................................................... 2,680 1,560
Other assets................................................................................... 1,685 --
------------- -------------
TOTAL ASSETS................................................................................ $ 137,347 $ 102,645
------------- -------------
------------- -------------
LIABILITIES AND ACCUMULATED GROUP DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................................................... $ 16,762 $ 12,399
Short-term debt................................................................................ 35,954 18,050
Deferred income taxes.......................................................................... 4,175 2,276
Accrued expenses and other current liabilities................................................. 1,899 1,164
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 58,790 33,889
Long-term debt................................................................................. 88,310 78,519
Deferred revenue and other liabilities......................................................... 2,058 1,438
------------- -------------
TOTAL LIABILITIES........................................................................... 149,158 113,846
------------- -------------
ACCUMULATED GROUP DEFICIT........................................................................ (11,811) (11,201)
------------- -------------
TOTAL LIABILITIES AND ACCUMULATED GROUP DEFICIT............................................. $ 137,347 $ 102,645
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to group financial statements.
VII-37
<PAGE>
CARMAX GROUP
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31,
--------------------
1996 1995
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................................................. $ (610) $ (2,109)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation...................................................................................... 857 376
Provision for deferred income taxes............................................................... 779 557
Increase in deferred revenue and other liabilities................................................ 620 374
(Increase) decrease in net accounts receivable.................................................... (9,106) 24,526
Decrease (increase) in inventory, prepaid expenses and other current assets....................... 2,103 (2,888)
Increase in other assets.......................................................................... (1,685) --
Increase in accounts payable, accrued expenses and other current liabilities...................... 5,098 19,180
-------- --------
Net cash (used in) provided by operating activities.................................................. (1,944) 40,016
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................................. (25,821) (16,897)
Proceeds from sales of property and equipment........................................................ 3,707 15,800
-------- --------
Net cash used in investing activities................................................................ (22,114) (1,097)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net....................................................... 17,904 33,946
Proceeds from issuance of (principal payments on) long-term debt, net................................ 9,791 (72,198)
-------- --------
Net cash provided by (used in) financing activities.................................................. 27,695 (38,252)
-------- --------
Increase in cash....................................................................................... 3,637 667
Cash at beginning of year.............................................................................. 2,219 2,159
-------- --------
Cash at end of period.................................................................................. $ 5,856 $ 2,826
-------- --------
-------- --------
</TABLE>
See accompanying notes to group financial statements.
VII-38
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The group financial statements of the CarMax Group conform to generally
accepted accounting principles. The interim period group financial statements
are unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim group financial statements have been included. The
fiscal year-end balance sheet data were derived from audited group financial
statements. The financial statements included herein should be read in
conjunction with the notes to group financial statements included in the CarMax
Group's 1996 annual financial statements.
2. DEBT
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150 million
unsecured revolving credit agreement with a group of banks. This facility
replaced a similar $100 million facility.
3. INTEREST RATE SWAPS
Recording the CarMax Group's interest rate swaps at fair value at August
31, 1996, would result in a loss of approximately $30,000 compared to a loss of
$300,000 at February 29, 1996. The notional amount of the swaps was
approximately $64 million at August 31, 1996, and $75 million at February 29,
1996.
4. SERVICING REVENUE
FNAC's servicing revenue, including gain on sale of receivables in fiscal
1997, totalled $4.1 million for the six months ended August 31, 1996, and $0.6
million for the six months ended August 31, 1995.
VII-39
<PAGE>
CIRCUIT CITY STORES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
JANUARY 24, 1997
The undersigned, having received the Notice of Special Meeting of
Shareholders and Proxy Statement dated December 24, 1996, hereby appoints
Richard L. Sharp 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 Common Stock of Circuit City Stores, Inc. (the "Company"), which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders of the Company to be held on Friday, January 24, 1997,
at 8:00 a.m., Eastern Time, and any adjournment thereof, and especially to vote
as set forth below and on the reverse hereof.
1. Approval of the amendments to the Articles of Incorporation to (i)
provide for the issuance of the Company's Common Stock in series by
action of the Board of Directors and (ii) redesignate each outstanding
share of the Company's existing Common Stock as one share of a new series
of Common Stock to be designated by the Board of Directors and called
"Circuit City Stores, Inc. -- Circuit City Group Common Stock."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of the amendment to the Articles of Incorporation to increase
the authorized Common Stock from 250,000,000 shares to 350,000,000
shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval of the amendments to the Articles of Incorporation to conform
certain provisions thereof to the current provisions of the Virginia
Stock Corporation Act and to delete certain provisions thereof that have
expired.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON REVERSE)
<PAGE>
4. Approval of the amendments to the 1994
Stock Incentive Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Approval of the amendments to the Annual
Performance Based Bonus Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. IN THEIR DISCRETION the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournments
thereof.
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 THROUGH 5.
Any proxy or proxies previously given for the meeting are revoked.
Dated:
----------------------------------
----------------------------------
(Signature)
----------------------------------
(Signature if held jointly)
Please sign exactly as the name
appears hereon.
[ ] I plan to attend the meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
<PAGE>
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