SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________ to _________
Commission File No.: 1-5767
CIRCUIT CITY STORES, INC.
(Exact name of Registrant as specified in its charter)
VIRGINIA 54-0493875
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
9950 Mayland Drive
Richmond, VA 23233
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (804) 527-4000
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
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Circuit City Stores, Inc. - Circuit City Group Common Stock, Par Value $0.50 New York Stock Exchange
Circuit City Stores, Inc. - CarMax Group Common Stock, Par Value $0.50 New York Stock Exchange
Rights to Purchase Preferred Stock,
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Series E, Par Value $20.00 New York Stock Exchange
Series F, Par Value $20.00 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K [ ].
On May 2, 1997, the Company had outstanding 98,230,743 Circuit City
Group common shares and 21,860,000 CarMax Group common shares. The aggregate
market value of the common shares held by non-affiliates (without admitting that
any person whose shares are not included in determining such value is an
affiliate) was $3,818,720,134 for the Circuit City Group and $322,435,000 for
the CarMax Group based upon the closing price of these shares as reported by the
New York Stock Exchange on May 2, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
Parts I, II, III and IV of this Form 10-K Report: (1) Pages 19 through 69 of the
Company's Annual Report to Shareholders for the fiscal year ended February 28,
1997 (Parts I, II and IV) and (2) "Item One - Election of Directors,"
"Beneficial Ownership of Securities," "Executive Compensation," "Employment
Agreements and Change-in-Control Arrangements," "Compensation of Directors" and
"Section 16(a) Compliance" in the May 9, 1997 Proxy Statement, furnished to
shareholders of the Company in connection with the 1997 Annual Meeting of such
shareholders (Part III).
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TABLE OF CONTENTS
Item Page
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PART I
1. Business 3
2. Properties 8
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
Executive Officers of the Company 11
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters 13
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Results of Operations and Financial Condition 13
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13
PART III
10. Directors and Executive Officers of the Company 14
11. Executive Compensation 14
12. Security Ownership of Certain Beneficial Owners and Management 14
13. Certain Relationships and Related Transactions 14
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 14
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PART I
Item 1. Business.
Circuit City Stores, Inc. was incorporated under the laws of Virginia
in 1949. Its corporate headquarters is located at 9950 Mayland Drive, Richmond,
Va. Its retail operations consist of Circuit City Superstores, Circuit City
electronics-only stores and mall-based Circuit City Express stores. It has a
wholly owned credit card bank subsidiary, First North American National Bank,
that extends consumer credit. Certain of its subsidiaries operate CarMax Auto
Superstores, a used auto retail business that also sells new cars.
Changes in Capital Structure. On January 24, 1997, Circuit City Stores,
Inc. shareholders approved the creation of two common stock series. The
Company's existing common stock was subsequently redesignated as Circuit City
Stores, Inc.-Circuit City Group Common Stock. In an initial public offering,
which was completed February 7, 1997, the Company sold 21.86 million shares of
Circuit City Stores, Inc.-CarMax Group Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, a retained interest in
the CarMax Group, and all other businesses in which the Company may be engaged
(other than those comprising the CarMax Group). The CarMax Group Common Stock is
intended to track separately the performance of the CarMax operations.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the CarMax
Group and the Circuit City Group for the purposes of preparing their respective
financial statements, holders of CarMax Group Stock and holders of Circuit City
Group Stock are shareholders of the Company and subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. Such attribution and the change in the equity structure of the
Company does not affect title to the assets or responsibility for the
liabilities of the Company or any of its subsidiaries. The results of operations
or financial condition of one Group could affect the results of operations or
financial condition of the other Group. Accordingly, financial information about
one Group should be read in conjunction with financial information about the
other Group, as well as consolidated information.
In this document, the following terms and definitions are used:
The Company refers to Circuit City Stores, Inc. and subsidiaries, which
includes Circuit City retail stores and related operations and the
CarMax retail stores and related operations.
Circuit City refers to the retail operations under the Circuit City
name and to all related operations such as product service and First
North American National Bank.
Circuit City Group refers to the Circuit City operations and to the
retained interest in the equity value of the CarMax Group.
CarMax Group and CarMax refer to the retail locations under the CarMax
name and to all related operations such as First North American Credit
Corporation.
Circuit City Group:
General. This section describes the business of the Circuit City Group
exclusive of its retained interest in the CarMax business which is discussed
separately below. Circuit City is the nation's largest retailer of brand-name
consumer electronics and major appliances and a leading retailer of personal
computers and music software. It sells video equipment, including televisions,
digital satellite systems, video cassette recorders and camcorders; audio
equipment, including home stereo systems, compact disc players, tape recorders
and tape players; mobile electronics, including car stereo systems and security
systems; home office products, including personal computers, peripheral
equipment and facsimile machines; other consumer electronics products, including
cellular phones, telephones and portable audio and video products; entertainment
software; and major appliances, including washers, dryers, refrigerators,
microwave ovens and ranges.
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Each Circuit City store location follows detailed operating procedures
and merchandising programs. Included are procedures for inventory maintenance,
advertising, customer relations, store administration, merchandise display,
store security and the demonstration and sale of products. Each store carries a
standard line of products selected at the corporate level and supplied directly
to the stores by regional warehouse distribution facilities.
Expansion. As of April 30, 1997, Circuit City operates 500 retail
locations throughout the United States. In fiscal 1998, Circuit City expects to
open approximately 60 Superstores, to replace 10 to 15 stores and to add Circuit
City Express stores. New-market entries will comprise 35 to 40 of the new
Superstores, including approximately 15 in the New York City market. Circuit
City's goal is to maximize profitability in each market it serves by capturing
large market shares that produce high sales volumes across a broad merchandise
mix.
Merchandising. Because management believes that local markets have
individual characteristics which vary greatly by the advertising, merchandising
and pricing strategies of competitors, Circuit City has organized its marketing
function to focus on markets with similar competitive conditions. Circuit City's
operating regions benefit from a centralized buying organization. The central
buying staff reduces costs by purchasing in large volumes, structures a sound
basic merchandising program and is supported by advanced management information
and distribution systems.
Circuit City's merchandising strategy emphasizes a broad selection of
products, including the industry's newest technologies, and a wide range of
prices. Merchandise mix and displays are controlled centrally to help ensure a
high level of consistency from store to store. Merchandise pricing and selling
strategies vary by market to reflect competitive conditions.
Although suggested retail prices are established by the corporate
merchandising department, each store manager is responsible for shopping the
local competition on a regular basis and has the authority to adjust retail
prices to meet market conditions. As part of its competitive strategy, Circuit
City advertises low prices and provides each customer with a low-price
guarantee. Circuit City will beat any legitimate price from a local competitor
stocking the same new item in a factory-sealed box. If a customer finds a lower
price, including Circuit City's own sale price, within 30 days, Circuit City
will refund 110 percent of the difference to the customer.
Suppliers. During fiscal 1997, Circuit City's 10 largest suppliers
accounted for approximately 51 percent of merchandise purchased. Circuit City's
major suppliers include Sony, Thomson, Whirlpool, Packard Bell, Panasonic, NEC,
JVC, Hitachi, Hewlett Packard and GE Appliances. Brand-name advertised products
are sold by all of Circuit City's retail locations. Circuit City has no
significant long-term contracts for the purchase of merchandise.
In the past, Circuit City has not experienced any continued or ongoing
difficulty obtaining satisfactory sources of supply and believes that adequate
sources of supply exist for the types of merchandise sold in its stores.
Advertising. Circuit City relies on considerable amounts of advertising
to stimulate Superstore and electronics only store sales. Advertising
expenditures were 4.8 percent of sales in fiscal 1997 and 4.7 percent of sales
in fiscal 1996 and 1995. Circuit City primarily uses print advertising,
including multi-page vehicles and run-of-press newspaper ads, for Superstore and
electronics-only store advertising. Circuit City emphasizes the use of
multi-page vehicles to allow a more extensive presentation of the broad
selection of products and price ranges it carries. These multi-page vehicles are
generally distributed in newspapers but are, in some cases, mailed directly to
residences outside the newspapers' area of circulation. Television campaigns
include merchandise assortment, price and customer service messages. With a
presence in most major metropolitan markets, Circuit City has begun to take
advantage of national broadcast and print advertising opportunities.
Competition. The brand-name consumer electronics and major appliance
business is highly competitive. Circuit City's competitors include other
full-service retailers, self-service retailers, specialty retailers with
differing product selections and services, general merchandise retailers and
local independent operators. Over the past three years, competition has shifted
to include more self-service retailers that often offer a more limited product
selection but at highly competitive prices.
Circuit City uses pricing, selection and service to differentiate
itself from the competition. As part of its competitive strategy, Circuit City
strives to maintain highly competitive prices and offers every customer the
low-price guarantee previously described. Circuit City Superstores offer a broad
product selection that includes 3,200 to 4,000 name-brand items (excluding music
software), depending on the selling square footage of the Superstore.
Professionally trained sales counselors, convenient credit options,
factory-authorized product repair, home delivery, installation centers for
automotive electronics, a toll-free product support line and a return policy of
30 days on most merchandise, excluding computer equipment, reflect a strong
commitment to customer service.
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Customer Satisfaction. Extensive market research is conducted to
measure Circuit City's customer service record and to refine its consumer offer.
Approximately 350,000 random surveys are conducted each year to track
satisfaction among Circuit City's existing customer base. These surveys,
conducted from customer transaction records, measure satisfaction with all
points of customer interaction, including sales counselors, cashiers, warehouse
staff, Roadshop installers and home delivery and product service
representatives. Quick feedback allows management to immediately address
individual performance issues. Customer Service Index scores for each store
recognize strong overall performance and quickly pinpoint management issues that
require attention.
Training. Circuit City staffs its stores with commissioned sales
counselors, support personnel (cashiers and stockpersons), a store manager, one
or more sales managers and, in larger stores, an operations manager. New sales
counselors complete a minimum two-week training program focused on product
knowledge, customer service and store operations. Seven regional training
facilities are utilized for classroom sessions taught by more than 40
professional trainers, and a state-of-the-art video facility produces audio,
video and computer-based training materials. Formalized training for store,
sales and operations managers focuses on human resource management, sales
management and critical operating procedures. Individual development plans
address personal training needs, giving employees advancement opportunity.
Consumer Credit. Because consumer electronics, personal computers and
major appliances represent relatively large purchases for the average consumer,
Circuit City's business is affected by consumer credit availability, which
varies with the state of the economy and the location of a particular store. In
fiscal 1997, approximately 15 percent of Circuit City's total sales were made
through its private-label credit card and 46 percent through third-party credit
sources.
The Company established a subsidiary, First North American National
Bank ("FNANB"), in fiscal 1991 to handle its private-label credit card business.
The credit card bank subsidiary is located in Marietta, Ga. Interfacing FNANB
with Circuit City's point-of-sale (POS) system has produced a rapid customer
credit approval process. A customer's application can be electronically scored,
and qualified customers can generally receive approval in under one minute. In
addition to increased credit availability, the private-label credit card program
provides Circuit City with additional marketing opportunities, including direct
mail campaigns to credit card customers and special financing programs for
promotions. FNANB's credit extension, customer service and collection operations
are fully automated with state-of the-art technology to maintain a high level of
customer service. This technology aids FNANB's collection philosophy of
contacting the cardholder in his/her initial days of delinquency to resolve the
past due status.
FNANB also manages a growing bankcard portfolio. Receivables generated
by both the private-label credit card and bankcard programs are sold to
non-affiliated entities under asset securitization programs.
Systems. Circuit City's in-store POS system maintains an on-line record
of all transactions and allows management to track performance by region, store
and individual sales counselor. The information gathered by the system supports
automatic replenishment of in-store inventory from the regional distribution
centers and is incorporated into product buying decisions. The POS system is
interfaced with the FNANB credit approval system. In the stores, electronic
signature capture for all credit card purchases, bar-code scanning for product
returns and repairs, automatic price tag printing for price changes and
computerized home delivery scheduling all enhance Circuit City's customer
service, eliminating time-consuming administrative tasks for store personnel and
reducing costs through smoother store-level execution.
Circuit City's proprietary Customer Service Information System
maintains an on-line history of customer purchases and enables Circuit City to
better assist individuals with future purchases by ensuring that new products
can be integrated with existing products in the home. It also facilitates
product returns and product repair. In addition, this system supports our
toll-free product support line. The product support line provides customers with
access to skilled product specialists. From their homes, customers can receive
immediate answers to basic questions regarding product usage and installation.
This service is available only for products purchased at Circuit City.
Distribution. At April 30, 1997, Circuit City operated nine automated
electronics distribution centers. These centers are designed to serve stores
within a 500-mile range. They utilize conveyor systems and laser bar-code
scanners to reduce labor requirements, prevent inventory damage and maintain
inventory control. Circuit City also operates smaller distribution centers
handling primarily appliances and larger electronics products. Management
believes that the use of the distribution centers enables it to efficiently
distribute a broad selection of merchandise to its stores, reduce inventory
requirements at individual stores, benefit from volume purchasing and maintain
accounting control. Circuit City also operates an automated, centralized
distribution center for music software. Virtually all of Circuit City's
Superstore and electronics-only store merchandise is distributed through its
distribution centers.
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Service. Circuit City offers service and repair for nearly all the
products it sells. Customers also are able to purchase extended warranty plans
on most of the merchandise Circuit City sells.
At April 30, 1997, Circuit City had 34 regional, factory-authorized
repair facilities. To meet customer needs, merchandise needing service or repair
usually is moved by truck from the stores to the nearest regional service
facility and is returned to the customer at the store after repair. Circuit City
also has in-home technicians who service large items not conveniently carried to
a store.
Extended warranty plans extend coverage beyond the normal
manufacturer's warranty period, usually with terms of coverage (including the
manufacturer's warranty period) between 12 and 60 months. Circuit City sells two
extended warranty programs on behalf of unrelated third parties that issue these
plans for merchandise sold by Circuit City and other retailers. One of these
programs is sold in most major markets and features in-home service for personal
computer products. The second program covers consumer electronics and major
appliances and was offered by approximately 85 percent of Circuit City
Superstores at April 30, 1997. Circuit City sells its own extended warranty
contracts in markets where the third-party programs are not available.
Seasonality. Like many retail businesses, Circuit City's sales are
greater in the fourth quarter of the fiscal year than in other periods of the
fiscal year because of holiday buying patterns. A corresponding pre-seasonal
inventory build-up is associated with this sales volume. This increased sales
volume results in a lower ratio of fixed costs to sales and produces a higher
ratio of operating income to sales in the fourth fiscal quarter. Circuit City's
sales for the fourth fiscal quarter (which includes the Christmas season) were
$2,282,625,000 in fiscal 1997, $2,180,506,000 in fiscal 1996 and $1,883,571,000
in fiscal 1995 and represented approximately 32 percent of sales in fiscal 1997
and 1996 and approximately 34 percent of sales in fiscal year 1995.
CarMax Group:
General. In 1993, the Company began to test CarMax The Auto
Superstore(R): a retail concept selling used cars. In fiscal 1997, the Company
announced the national rollout of this concept. CarMax is a leading retailer of
used cars and light trucks in the United States with seven stores located in the
Southeast and one vehicle reconditioning center in Orlando, Florida. CarMax
purchases, reconditions and sells used vehicles at each of its stores and sells
new vehicles at one of its Atlanta, Georgia locations under a franchise
agreement with Chrysler Corporation ("Chrysler"). CarMax has also entered into
an agreement, pending manufacturer approval, for a second Chrysler franchise at
an Atlanta location to be opened in fiscal 1998.
Expansion. CarMax has announced an aggressive rollout plan. Over the
next five years, it plans to reach a total of 80 to 90 locations, expand the
retail repair business and add new-vehicle franchises that will build volume and
further leverage the fixed costs of the used-car Superstores.
Merchandising. Each CarMax store features a broad selection of quality
used cars and light trucks with a wide range of prices appealing to a wide range
of potential customers. CarMax stores vary in inventory size from 400 to 1,000
vehicles depending on local market size and consumer demand. To appeal to the
vast array of consumer preferences and budgets, CarMax offers its used vehicles
under two programs - the CarMax program and the ValuMax program. CarMax vehicles
generally are one to five years old, with less than 60,000 miles, and most are
priced from $9,500 to $21,000. Through the ValuMax program, CarMax sells
high-quality used vehicles that generally are more than five years old and/or
have over 60,000 miles, with most priced in a range from $4,500 to $10,500. To
ensure that CarMax quality standards are maintained, vehicles under both
programs undergo a comprehensive, certified quality inspection by CarMax service
technicians. CarMax backs its commitment to quality with a five-day or 250-mile,
money-back guarantee, subject to vehicles being returned in substantially the
same condition, and a free, 30-day comprehensive warranty on each vehicle.
CarMax's used cars are priced at an average of $500 to $1,000 below the
NADA average book value. All customers receive the same low price with no
negotiating required. CarMax does not charge any processing, administration,
application or other "hidden" fees, other than those mandated by local and state
regulations. Competitive financing and extended warranty rates also are offered.
CarMax has replaced the traditional "trade-in" transaction with a process in
which trained CarMax buyers appraise any vehicle, usually in 30 minutes or less,
and provide the vehicle's owner with a written guaranteed cash offer that is
good for seven days or 300 miles. The appraisal process is available to
everyone, whether or not they are purchasing a vehicle from CarMax.
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Suppliers. CarMax acquires a significant proportion of its used-vehicle
inventory at its store locations. CarMax appraises and makes an offer to
purchase any properly documented vehicle from an individual. CarMax also
acquires a significant proportion of its used vehicles through auctions and, to
a lesser extent, directly from other sources, including wholesalers, franchised
and independent dealers and fleet owners, such as leasing companies and rental
companies. Based on consumer acceptance of the appraisal process at existing
CarMax stores and the experience and success of CarMax to date in acquiring
vehicles from auctions and other sources, management believes that its sources
of used vehicles will continue to be sufficient to meet current needs and to
support planned expansion.
Reconditioning. All vehicles are thoroughly inspected and
reconditioned. Most vehicles are reconditioned at each store facility. With a
significant portion of vehicles purchased at the store, in-store reconditioning
reduces transportation cost and helps quickly move vehicles onto the sales lot.
CarMax stores have 15 to 40 mechanical bays available for reconditioning. A
centralized 40-bay reconditioning facility in Orlando, Fla., supplements
in-store capacity and supports new store openings.
Advertising. CarMax is able to realize significant cost savings on
advertising by purchasing its advertising jointly with Circuit City, thus
leveraging Circuit City's media buying power. Television and radio ads are
designed to enhance consumer awareness of the CarMax name and key components of
the CarMax offer and are distinctly different from those placed by most auto
dealers. Newspaper ads promote CarMax's selection and price leadership,
targeting consumers with immediate purchase intentions. Advertising expenditures
were 2.3 percent of sales in fiscal 1997, 2.6 percent of sales in 1996, and 2.9
percent of sales in 1995.
Franchise. CarMax operates its new-car dealership in the Atlanta market
under a Sales and Service Agreement ("Franchise Agreement") with Chrysler. The
Franchise Agreement provides, among other things, that CarMax has the right and
obligation to sell specified models of new Chrysler-manufactured vehicles and
provide related parts and service solely at its Gwinnett location. The Franchise
Agreement imposes various requirements on CarMax and compliance with these
requirements is closely monitored by Chrysler. The Franchise Agreement may be
terminated by Chrysler on generally not less than 60 days written notice for
specified reasons.
Competition. Automotive retailing in the United States is highly
competitive with approximately 23,000 franchised dealers and an even greater
number of independent used-vehicle dealers. In the used-vehicle market, CarMax
competes with existing franchised and independent dealers, rental companies and
private parties. The used-vehicle market also has attracted attention recently
from a number of public companies. Many franchised new-car dealerships have also
increased their focus on the used-vehicle market. Part of CarMax's business
strategy is to position itself as a low-price, low-cost operator in the
industry.
In the new-vehicle market, CarMax competes with other franchised
dealers offering vehicles produced by the same or other manufacturers, auto
brokers and leasing companies. As is typical of such arrangements, CarMax's
existing franchise agreement with Chrysler does not guarantee exclusivity within
a specified territory. Aggressive discounting by manufacturers of new cars,
which typically occurs in the fall during the close-out of prior year models,
may result in lower retail sales prices and margins for used vehicles during
such discounting.
Customer Satisfaction. The elements of the CarMax offer are designed to
create a customer-friendly experience. The no-haggle pricing allows the sales
consultant to focus solely on the customer's needs. CarMax sales personnel play
a significant role in ensuring a customer-friendly sales process. All sales
consultants, including both full and part-time employees, are compensated solely
on a commission basis. The amount of the commission is a fixed dollar amount per
vehicle sold. The entire purchase process, including a test-drive and financing,
can be completed in less than one hour. Extensive market research is conducted
to measure CarMax's customer service record and to refine its consumer offer.
Training. At the completion of the fiscal 1998 store opening plan, the
17 location general managers are expected to average almost three years of
CarMax management experience and 10 years of prior management experience. The
location general manager and department managers for a new store are typically
hired at least one year prior to the scheduled store opening date. During that
time these managers participate in a rigorous training program at CarMax
headquarters and the existing stores that rotates them through most key
departments and operations of the business. Each store has 10 to 15 inventory
buyers. Each buyer undergoes an 18-to-24 month apprenticeship under the tutelage
of an experienced buyer and appraise thousands of cars before making their first
independent purchase. All sales consultants complete two weeks of initial
training.
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Consumer Credit. CarMax provides financing for its customers' vehicle
purchases through its financing unit, First North American Credit Corporation
("FNAC") and other third-party lenders. Sub-prime financing is provided by
third-party lenders with no financial recourse to CarMax. Sales consultants use
AutoMation(R) to electronically submit financing applications and receive
responses from multiple lenders, generally in less than eight minutes.
Systems. CarMax utilizes AutoMation(R), a unique, proprietary and
enterprise-wide inventory management system. Using a touch screen, customers can
electronically search the inventory for cars that meet their feature
requirements and price range. AutoMation(R) displays a color picture of the car
and generates a vehicle information sheet for customer reference. After the
selection process is complete, financing applications and purchase and title
forms are submitted electronically, reducing customer wait time. The inventory
management system includes bar codes on each vehicle and each on-site parking
place. Daily scanning tracks movement of vehicles on the lot. An electronic gate
helps track test drives for vehicles and sales consultants. This combination of
systems allows close monitoring and addressing of inventory and sales
performance issues.
Service. Until fiscal 1997, CarMax only performed minor repair service
under the CarMax free 30-day comprehensive warranty on used vehicles. CarMax
began testing retail repair service in its Atlanta, Georgia locations and more
extensive warranty service on Chrysler vehicles at the new-car franchise in
fiscal 1997. In order to achieve greater future profitability, attract new
customers and further develop customer loyalty, retail repair service was
expanded to all retail locations commencing in fiscal 1998.
Optional primary or extended service policies are available on every
vehicle at low, fixed prices. CarMax's MaxCare(R) extended service policies
offer superior bumper-to-bumper protection for up to an additional 72 months or
100,000 miles.
Seasonality. The business of CarMax is seasonal, with each location
generally experiencing more of its net sales in the first half of the fiscal
year. CarMax anticipates that the seasonality of its business may vary from
region to region as its operations expand geographically.
Employees:
On April 30, 1997, the Company had 25,859 hourly and salaried employees
and 15,883 sales employees working on a commission basis. None of the Company's
employees is subject to a collective bargaining agreement. Additional personnel
are employed during peak selling seasons. The Circuit City Group accounted for
24,616 of the Company's hourly and salaried employees and 15,455 of the
Company's sales employees working on a commission basis. The CarMax Group
accounted for 1,243 of the Company's hourly and salaried employees and 428 of
the Company's sales employees working on a commission basis. Management of the
Company considers its relationship with its employees to be good.
Item 2. Properties.
At April 30, 1997, the Company's Circuit City retail operations were
conducted in 500 locations. The Company operates four Circuit City Superstore
formats with square footage and merchandise assortments tailored to population
and volume expectations for specific trade areas. The "D" format was developed
in fiscal 1995 to serve the most populous trade areas. At the end of fiscal
1997, selling space in the "D" format averaged approximately 24,000 square feet
with total square footage averaging 43,360. The "D" stores offer the largest
merchandise assortment of all the formats. The "C" format constitutes the
largest percent of the store base. Selling square footage in this format has
been increased during the last several years, and new "C" stores in fiscal 1997
generally had between 17,000 and 20,000 square feet of selling space; total
square footage for all "C" stores averaged 34,220. The "B" format is often
located in smaller markets or in trade areas that are on the fringes of larger
metropolitan markets. At the end of fiscal 1997, selling space in these stores
averaged approximately 12,000 square feet with an average total square footage
25,318. The "B" stores offer a broad merchandise assortment that maximizes
return on investment in these lower volume areas. The "A" format serves the
least populated trade areas. Selling space in these stores averaged
approximately 10,000 square feet at the end of fiscal 1997, and total square
footage averaged 18,507. The "A" stores feature a layout, staffing levels and
merchandise assortment that creates high productivity in the smallest markets.
The four electronics-only stores offer the Company's full line of
consumer electronics and a limited selection of major appliances. Selling space
in these stores averages approximately 4,000 square feet with an average total
square footage of approximately 8,000. The Company's 49 mall-based Circuit City
Express stores are located in regional malls, average approximately 2,000 to
3,000 square feet in size and sell small, gift-oriented items.
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The Company's CarMax operations were conducted in seven locations. The
Company operates three different store formats which vary in acreage, vehicle
assortment and facility square footage depending on local market size and
consumer demands. A typical "C" store will have 24 to 28 acres with room to
display up to 1,000 used vehicles and showroom, reconditioning and service
facilities totaling about 92,000 square feet. The typical "B" format store will
cover 20 to 23 acres, have room to display up to 800 used vehicles and include
facilities with a total of approximately 74,000 square feet. The "A" format will
typically cover 15 to 19 acres, have room for up to 600 used vehicles and
include facilities that total about 57,000 square feet. All formats will include
additional display room for new cars, wherever possible.
The following table summarizes the Company's Circuit City and CarMax
stores as of April 30, 1997:
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Circuit City Group CarMax Group
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Superstores Electronics - Mall Superstores
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D C B A Only Stores Total C B A Total
- - - - ---- ------ ----- ------------------- -----
Alabama - 5 - - - 1 6 - - - -
Arizona 2 6 1 - - 1 10 - - - -
Arkansas - 2 - - - - 2 - - - -
California 12 55 11 2 - 3 83 - - - -
Colorado 5 2 - 1 - - 8 - - - -
Connecticut 2 2 - - - - 4 - - - -
Delaware - 1 - - - 1 2 - - - -
District of Columbia - - - - - 1 1 - - - -
Florida 4 23 7 - - 1 35 - 2 - 2
Georgia 3 8 4 - - 4 19 1 - 1 2
Hawaii 1 - - - - - 1 - - - -
Illinois 6 19 4 - - 4 33 - - - -
Indiana - 3 2 - - - 5 - - - -
Kansas 1 3 - - - - 4 - - - -
Kentucky - 5 - - - - 5 - - - -
Louisiana - 5 - - - - 5 - - - -
Maine - - 1 - - - 1 - - - -
Massachusetts 1 8 3 - - 6 18 - - - -
Maryland 1 12 1 1 4 19 - - - -
Michigan 7 4 1 2 - 1 15 - - - -
Minnesota 1 7 1 - - 3 12 - - - -
Missouri 1 9 - - - 1 11 - - - -
Nebraska 1 1 - - - - 2 - - - -
Nevada 1 3 - - - - 4 - - - -
New Hampshire - 4 - - - 2 6 - - - -
New Jersey - 4 - - - - 4 - - - -
New Mexico 1 - - - - - 1 - - - -
New York 4 2 - 1 - 3 10 - - - -
North Carolina 5 6 4 1 - 2 18 - 1 1 2
Ohio 6 8 1 - - 2 17 - - - -
Oklahoma - 2 1 - - - 3 - - - -
Oregon 2 5 - - - - 7 - - - -
Pennsylvania 2 10 1 2 - 2 17 - - - -
Rhode Island - 1 - - - - 1 - - - -
South Carolina 2 4 1 - - 1 8 - - - -
Tennessee 2 7 1 - 1 - 11 - - - -
Texas 7 25 4 5 - 2 43 - - - -
Utah 5 - - - - - 5 - - - -
Virginia 2 13 5 4 - 4 28 - - 1 1
Washington 4 3 1 - - - 8 - - - -
West Virginia - - - - 2 - 2 - - - -
Wisconsin 4 2 - - - - 6 - - - -
---- ---- --- --- -- --- -- ----------------------------
95 279 55 18 4 49 500 1 3 3 7
== === == == = == === = = = =
</TABLE>
9 of 17
<PAGE>
Of the Circuit City stores open at April 30, 1997, the Company owns
four stores and leases the remaining 496 stores. Two of the four stores owned
are financed by Industrial Development Revenue Bonds that are collateralized by
the applicable land, building and equipment.
All of the CarMax properties are leased.
For information with respect to obligations for Circuit City leases,
see note 9 of the Notes to Circuit City Group Financial Statements on page 52 of
the Company's 1997 Annual Report to Stockholders, which is incorporated herein
by reference. For information with respect to obligations for CarMax leases, see
note 11 of the Notes to CarMax Group Financial Statements on page 68 of the
Company's 1997 Annual Report to Stockholders, which is incorporated herein by
reference.
The Company owns a 388,000-square-foot consumer electronics/appliance
distribution center in Doswell, Va.; a 387,000 square-foot consumer
electronics/appliance distribution center in Atlanta, Ga.; and an
electronic/appliance service center in Kansas City, Mo. These centers have been
financed with Industrial Development Revenue Bonds.
The Company owns the land but leases the two buildings in which its
corporate headquarters is located. The Company leases space for all warehouse,
service and office facilities except for the aforementioned properties.
Item 3. Legal Proceedings.
In the normal course of business, the Company is involved in various
legal proceedings. Based upon the Company's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Company's
financial position, liquidity or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) A special meeting of the Company's shareholders was held
on January 24, 1997.
(c) (i) At such special meeting, the shareholders of the Company
approved the amendment of the Amended and Restated
Articles of Incorporation (the "Articles") to provide for
the issuance of the Company's Common Stock in series by
action of the Board of Directors, of which 125,000,000
shares would initially be designated by the Board of
Directors as Circuit City Stores, Inc.--Circuit City
Group Common Stock (the "Circuit City Stock") and
125,000,000 would initially be designated as Circuit City
Stores, Inc.--CarMax Group Common Stock (the "CarMax
Stock"). The amendment of the Articles was approved by
the following vote:
<TABLE>
<CAPTION>
<S> <C>
=======================================================================================
Broker
For Against Abstain Non-Votes
======================================================================
Articles 73,217,506 438,975 229,977 8,485,918
=======================================================================================
(ii) At such special meeting, the shareholders of the Company
approved the amendment of the Articles to increase the
number of authorized shares of common stock to
350,000,000 shares from 250,000,000 shares. The amendment
of the Articles was approved by the following vote:
<CAPTION>
=======================================================================================
Broker
For Against Abstain Non-Votes
======================================================================
Articles 71,323,637 2,374,785 188,036 8,485,918
=======================================================================================
10 of 17
<PAGE>
(iii)At such special meeting, the shareholders of the Company
approved the amendment of the Articles to conform certain
provisions thereof to the current provisions of the
Virginia Stock Corporation Act and to delete certain
provisions thereof that have expired. The amendment of
the Articles was approved by the following vote:
<CAPTION>
========================================================================================
Broker
For Against Abstain Non-Votes
=======================================================================
Articles
81,436,170 663,963 272,243 0
========================================================================================
(iv) At such special meeting, the shareholders of the Company
approved the amendments of the 1994 Stock Incentive Plan
(the "1994 Plan"). The amendments thereof (i) clarify
that future grants may be made with respect to either
Circuit City Stock or CarMax Stock, or both, (ii) reserve
5,700,000 shares of CarMax Stock for issuance pursuant to
awards made under the 1994 Plan and (iii) permit
conversion of options outstanding under an existing stock
option plan of one of the Company's subsidiaries into
options to acquire shares of CarMax Stock. The amendments
of the 1994 Plan were approved by the following vote:
<CAPTION>
========================================================================================
Broker
For Against Abstain Non-Votes
======================================================================
1994 Plan 70,829,647 2,577,867 478,944 8,458,918
========================================================================================
(v) At such annual meeting, the shareholders of the Company
approved amendments of the Annual Performance-Based Bonus
Plan (the "Bonus Plan") to modify the definition of
Performance Criteria under the Bonus Plan. The amendment
of the Bonus Plan was approved by the following vote:
<CAPTION>
========================================================================================
Broker
For Against Abstain Non-Votes
======================================================================
Bonus Plan 72,418,001 973,873 494,584 8,458,918
========================================================================================
</TABLE>
Executive Officers of the Company.
The following table identifies the present executive officers of the
Company. The Company is not aware of any family relationship between any
executive officers of the Company or any executive officer and any director of
the Company. All executive officers are generally elected annually and serve for
one year or until their successors are elected and qualify.
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C>
Richard L. Sharp 50 Chairman of the Board,
Chief Executive Officer
W. Alan McCollough 47 President and
Chief Operating Officer
Richard S. Birnbaum 44 Executive Vice President
Operations
Dennis J. Bowman 43 Senior Vice President and
Chief Information Officer
11 of 17
<PAGE>
W. Stephen Cannon 45 Senior Vice President and
General Counsel
Michael T. Chalifoux 50 Senior Vice President,
Chief Financial Officer and
Corporate Secretary
John A. Fitzsimmons 54 Senior Vice President
Administration
W. Austin Ligon 46 Senior Vice President
Automotive
Jonathan T. M. Reckford 34 Senior Vice President
Corporate Planning and Communications
Jeffrey S. Wells 51 Senior Vice President
Human Resources
</TABLE>
Mr. Sharp is a director and a member of the Company's executive
committee. He joined the Company in 1982 as executive vice president and was
elected president in 1984, chief executive officer in 1986, and chairman of the
board in 1994.
Mr. McCollough joined the Company in 1987 as general manager of
corporate operations. He was elected assistant vice president in 1989, vice
president and Central Division president in 1991, senior vice president -
merchandising in 1994, and president and chief operating officer in 1997.
Mr. Birnbaum joined the Company in 1972. He was elected vice president
in 1985, Central Division president in 1986, senior vice president - marketing
in 1991, and executive vice president - operations in 1994.
Mr. Bowman joined the Company in May 1996 as vice president and chief
information officer. He was elected senior vice president and chief information
officer in 1997. Prior to joining the Company, he had served as senior vice
president - information services for Rite Aid Corporation since 1993 and was
previously a consultant with McKinsey & Company since 1984.
Mr. Cannon joined the Company in April 1994 as senior vice president
and general counsel. Prior to joining the Company, he had been a partner in
Wunder, Diefenderfer, Ryan, Cannon & Thelen, a Washington, D.C., law firm since
1986.
Mr. Chalifoux is a director and a member of the Company's executive
committee. He joined the Company in 1983 as corporate controller and was elected
vice president and chief financial officer in 1988. He was elected senior vice
president in 1991 and became corporate secretary in 1993.
Mr. Fitzsimmons joined the Company in 1987 as senior vice president -
administration.
Mr. Ligon joined the Company in 1990 as vice president - corporate
planning and communications. He was elected senior vice president - corporate
planning and communications in 1991, senior vice president - corporate planning
and automotive in 1994, and senior vice president-automotive and CarMax
president in 1996.
Mr. Reckford joined the Company in 1995 as vice president - corporate
planning and communications. He was elected senior vice president - corporate
planning and communications in 1996. Prior to joining the Company, he was
director of business planning and development for Disney Design and Development
since 1991.
Mr. Wells joined the Company in 1996 as senior vice president - human
resources. Prior to joining the Company, he had served as a senior vice
president of Toys "R" Us, Inc. since 1992.
12 of 17
<PAGE>
Part II
With the exception of the information incorporated by reference from
the 1997 Annual Report to Stockholders in Item 2 of Part I and Items 5, 6, 7,
and 8 of Part II and Item 14 of Part IV of this Form 10-K, the Company's 1997
Annual Report to Stockholders is not to be deemed filed as a part of this
Report.
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
Incorporated herein by reference is the information appearing under the
heading "Common Stock" on page 23 of the Company's 1997 Annual Report to
Stockholders.
As of May 2, 1997, there were 8,190 shareholders of record of the
Circuit City Group common stock and 144 shareholders of record of the CarMax
Group common stock.
Item 6. Selected Financial Data.
Incorporated herein by reference is the information appearing under the
heading "Reported Historical Information" on page 19 of the Company's 1997
Annual Report to Stockholders.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Incorporated herein by reference is the information appearing under the
headings "Circuit City Stores, Inc. Management's Discussion and Analysis of
Results of Operations and Financial Condition" on pages 19 through 22, "Circuit
City Group Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 38 through 41, and "CarMax Group Management's
Discussion and Analysis of Results of Operations and Financial Condition" on
pages 55 through 57 of the Company's 1997 Annual Report to Stockholders.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference is the information appearing under the
headings "Consolidated Statements of Earnings," "Consolidated Balance Sheets,"
"Consolidated Statements of Cash Flows," "Consolidated Statements of
Stockholders' Equity," "Notes to Consolidated Financial Statements," and
"Independent Auditors' Report," on pages 24 through 37 of the Company's Annual
Report to Stockholders.
Incorporated herein by reference is the information appearing under the
headings "Circuit City Group Statements of Earnings," "Circuit City Group
Balance Sheets," "Circuit City Group Statements of Cash Flow," "Circuit City
Group Statements of Group Equity," "Notes to Circuit City Group Financial
Statements," and "Independent Auditors' Report," on pages 42 through 54 of the
Company's 1997 Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under the
headings "CarMax Group Statements of Operations," "CarMax Group Balance Sheets,"
"CarMax Group Statements of Cash Flows," "CarMax Group Statements of Group
Equity (Deficit)," "Notes to CarMax Group Financial Statements," and
"Independent Auditors' Report," on pages 58 through 69 of the Company's 1997
Annual Report to Stockholders.
Incorporated herein by reference is the information appearing under the
heading "Quarterly Financial Data (Unaudited)" on pages 36, 54 and 69 of the
Company's 1997 Annual Report to Stockholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
With the exception of the information incorporated by reference from
the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form
10-K, the Company's Proxy Statement dated May 9, 1997, is not to be deemed filed
as a part of this Report.
13 of 17
<PAGE>
Item 10. Directors and Executive Officers of the Company.
The information concerning the Company's directors required by this
Item is incorporated by reference to the section entitled "Item One - Election
of Directors" appearing on pages 2 through 3 of the Company's Proxy Statement
dated May 9, 1997.
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the section in Part I hereof entitled
"Executive Officers of the Company" appearing on pages 11 and 12.
The information concerning compliance with section 16(a) of the
Securities Exchange Act of 1934 required by this Item is incorporated by
reference to the section entitled "Section 16(a) Compliance" appearing on page
14 of the Company's Proxy Statement dated May 9, 1997.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the sections entitled "Executive Compensation," "Employment Agreements and
Change-In-Control Arrangements," and "Compensation of Directors," appearing on
pages 7 through 9 and pages 13 and 14 of the Company's Proxy Statement dated May
9, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the section entitled "Beneficial Ownership of Securities" appearing on pages 4
and 5 of the Company's Proxy Statement dated May 9, 1997.
.
Item 13. Certain Relationships and Related Transactions.
None.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following Financial Statements of
Circuit City Stores, Inc., the Circuit City Group and the CarMax
Group, and the related Independent Auditors' Reports are
incorporated by reference to pages 24 through 37, 42 through 54,
and 58 through 69 of the Company's 1997 Annual Report to
Shareholders:
Consolidated Statements of Earnings for the fiscal years ended
February 28, 1997, February 29, 1996, and February 28, 1995.
Circuit City Group Statements of Earnings for the fiscal years
ended February 28, 1997, February 29, 1996, and February 28,
1995.
CarMax Group Statements of Operations for the fiscal years ended
February 28, 1997, February 29, 1996, and February 28, 1995.
Consolidated Balance Sheets at February 28, 1997, and February
29, 1996.
Circuit City Group Balance Sheets at February 28, 1997, and
February 29, 1996.
CarMax Group Balance Sheets at February 28, 1997, and February
29, 1996.
Consolidated Statements of Cash Flows for the fiscal years ended
February 28, 1997, February 29, 1996, and February 28, 1995.
Circuit City Group Statements of Cash Flows for the fiscal years
ended February 28, 1997, February 29, 1996, and February 28,
1995.
14 of 17
<PAGE>
CarMax Statements of Cash Flows for the fiscal years ended
February 28, 1997, February 29, 1996, and February 28, 1995.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended February 28, 1997, February 29, 1996, and February
28, 1995.
Circuit City Group Statements of Group Equity for the fiscal
years ended February 28, 1997, February 29, 1996, and February
28, 1995.
CarMax Group Statements of Group Equity (Deficit) for the fiscal
years ended February 28, 1997, February 29, 1996, and February
28, 1995.
Notes to Consolidated Financial Statements.
Notes to Circuit City Group Financial Statements.
Notes to CarMax Group Financial Statements.
Independent Auditors' Report, Circuit City Stores, Inc.
Independent Auditors' Report, Circuit City Group.
Independent Auditors' Report, CarMax Group.
2. Financial Statement Schedule. The following financial statement
schedules of Circuit City Stores, Inc., Circuit City Group and
CarMax Group for the fiscal years ended February 28, 1997,
February 29, 1996, and February 28, 1995, are filed as part of
this Report and should be read in conjunction with the Financial
Statements of Circuit City Stores, Inc., Circuit Group and CarMax
Group.
<TABLE>
<S> <C>
II Valuation and Qualifying Accounts and Reserves, Circuit City Stores, Inc. S-1
II Valuation and Qualifying Accounts and Reserves, Circuit City Group S-1
II Valuation and Qualifying Accounts and Reserves, CarMax Group S-1
Independent Auditors' Report on Circuit City Stores, Inc. Financial Statement Schedule S-2
Independent Auditors' Report on Circuit City Group Financial Statement Schedule S-2
Independent Auditors' Report on CarMax Group Financial Statement Schedule S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules
are filed as part of, or incorporated by reference into, this
Report.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the last
fiscal quarter covered by this Report.
15 of 17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CIRCUIT CITY STORES, INC.
(Registrant)
By s/ Richard L. Sharp
-----------------------------
Richard L. Sharp
Chairman of the Board and
Chief Executive Officer
By s/ Michael T. Chalifoux
-----------------------------
Michael T. Chalifoux
Senior Vice President,
Chief Financial Officer and
Corporate Secretary
By s/ Philip J. Dunn
-----------------------------
Philip J. Dunn
Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer
May 27, 1997
16 of 17
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
Michael T. Chalifoux* Director May 27, 1997
- --------------------------
Michael T. Chalifoux
Richard N. Cooper* Director May 27, 1997
- --------------------------
Richard N. Cooper
Barbara S. Feigin* Director May 27, 1997
- --------------------------
Barbara S. Feigin
Theodore D. Nierenberg* Director May 27, 1997
- --------------------------
Theodore D. Nierenberg
Hugh G. Robinson* Director May 27, 1997
- --------------------------
Hugh G. Robinson
Walter J. Salmon* Director May 27, 1997
- --------------------------
Walter J. Salmon
Mikael Salovaara* Director May 27, 1997
- --------------------------
Mikael Salovaara
John W. Snow* Director May 27, 1997
- --------------------------
John W. Snow
s/ Richard L. Sharp Director May 27, 1997
- --------------------------
Richard L. Sharp
Edward Villanueva* Director May 27, 1997
- --------------------------
Edward Villanueva
Alan L. Wurtzel* Director May 27, 1997
- --------------------------
Alan L. Wurtzel
By: s/ Richard L. Sharp*
- --------------------------
Richard L. Sharp,
Attorney-In-Fact
</TABLE>
The original powers of attorney authorizing Richard L. Sharp and Michael T.
Chalifoux, or either of them, to sign this annual report on behalf of certain
directors and officers of the Company are included as exhibit 24.
17 of 17
<PAGE>
<TABLE>
S-1
Schedule II
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
(Amounts in thousands)
<CAPTION>
Balance at Charged Charge-offs Balance at
Beginning to less End of
Description of Year Income Recoveries Year
----------- ------- ------ ---------- ----
<S> <C>
Reserves deducted from assets to which they apply:
Consolidated:
Year ended February 28, 1995:
Allowance for doubtful accounts $ 6,851 $ 1,292 $ (1,406) $ 6,737
======== ======= ========= ========
Year ended February 29, 1996:
Allowance for doubtful accounts $ 6,737 $ 5,078 $ (1,790) $ 10,025
======== ======= ========= ========
Year ended February 28, 1997:
Allowance for doubtful accounts $ 10,025 $ 8,773 $ (3,402) $ 15,396
======== ======= ========= ========
Circuit City Group:
Year ended February 28, 1995:
Allowance for doubtful accounts $ 6,756 $ 1,020 $ (1,345) $ 6,431
======== ======= ========= ========
Year ended February 29, 1996:
Allowance for doubtful accounts $ 6,431 $ 4,599 $ (1,450) $ 9,580
======== ======= ========= ========
Year ended February 28, 1997:
Allowance for doubtful accounts $ 9,580 $ 6,817 $ (2,863) $ 13,534
======== ======= ========= ========
CarMax Group:
Year ended February 28, 1995:
Allowance for doubtful accounts $ 95 $ 272 $ (61) $ 306
======== ======= ========= ========
Year ended February 29, 1996:
Allowance for doubtful accounts $ 306 $ 479 $ (340) $ 445
======== ======= ========= ========
Year ended February 28, 1997:
Allowance for doubtful accounts $ 445 $ 1,956 $ (539) $ 1,862
======== ======= ========= ========
</TABLE>
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 3, 1997, we reported on the consolidated balance sheets of
Circuit City Stores, Inc. and subsidiaries (the Company) as of February 28, 1997
and February 29, 1996, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 1997, as contained in the February 28, 1997
annual report to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year ended February 28, 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related Circuit City Stores, Inc. financial statement schedule as listed in Item
14(a)2 of this Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1997
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 3, 1997, we reported on the balance sheets of the Circuit
City Group as of February 28, 1997 and February 29, 1996, and the related
statements of earnings, group equity and cash flows for each of the fiscal years
in the three-year period ended February 28, 1997, as contained in the February
28, 1997 annual report to stockholders. Our report dated April 3, 1997 includes
a qualification related to the effects of not consolidating the CarMax Group
with the Circuit City Group as required by generally accepted accounting
principles. These financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K of Circuit City Stores, Inc. for
the year ended February 28, 1997. In connection with our audits of the
aforementioned financial statements, we also have audited the related Circuit
City Group financial statement schedule as listed in Item 14(a)2 of this Form
10-K. This financial statement schedule is the responsibility of Circuit City
Stores, Inc.'s management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, except for the effects of not consolidating the CarMax Group
with the Circuit City Group as discussed in the preceding paragraph, such
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1997
<PAGE>
S-2
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors
Circuit City Stores, Inc.:
Under date of April 3, 1997, we reported on the balance sheets of the CarMax
Group as of February 28, 1997 and February 29, 1996, and the related statements
of operations, group equity (deficit) and cash flows for each of the fiscal
years in the three-year period ended February 28, 1997, as contained in the
February 28, 1997 annual report to stockholders. These financial statements and
our report thereon are incorporated by reference in the annual report on Form
10-K of Circuit City Stores, Inc. for the year ended February 28, 1997. In
connection with our audits of the aforementioned financial statements, we also
have audited the related CarMax Group financial statement schedule as listed in
Item 14(a)2 of this Form 10-K. This financial statement schedule is the
responsibility of Circuit City Stores, Inc.'s management. Our responsibility is
to express an opinion on this financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1997
<PAGE>
Circuit City Stores, Inc.
Annual Report on Form 10-K
INDEX TO EXHIBITS
(3) Articles of Incorporation and Bylaws
(a) Amended and Restated Articles of Incorporation of the
Company, effective February 3, 1997, filed as Exhibit
4.1 to the Company's Registration Statement on Form
S-8 (Registration No. 333-22759), filed on March 4,
1997, are expressly incorporated herein by this
reference.
(b) Bylaws of the Company, as amended and restated June
18, 1996, filed as Exhibit 3(ii) to the Company's
Quarterly Report on Form 10-Q for the quarter ended
May 31, 1996, (File No. 1-5767) are expressly
incorporated herein by this reference.
(4) Instruments Defining the Rights of Security Holders, Including Indentures
(a) Amended and Restated Rights Agreement dated February
3, 1997, between the Company and Norwest Bank
Minnesota, N.A., as Rights Agent, is filed herewith.
(b) $100,000,000 term loan agreement dated July 28, 1994,
between the Company, the Long-Term Credit Bank of
Japan, Limited, as agent, and the banks named
therein. Pursuant to Item 601(b)(4)(iii) of
Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(c) First Amendment to Term Loan Agreement dated October
24, 1995, to the $100,000,000 term loan agreement
dated July 28, 1994, between the Company, the
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(d) Second Amendment to Term Loan Agreement dated August
21, 1996, to the $100,000,00 term loan agreement
dated July 28, 1994, between the Company, the
Long-Term Credit Bank of Japan, Limited, as agent,
and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(e) $175,000,000 term loan agreement dated May 26, 1995,
between the Company, the LTCB Trust Company, as
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
(f) First Amendment to Term Loan Agreement dated October
24, 1995, to the $175,000,000 term loan agreement
dated May 26, 1995, between the Company, the LTCB
Trust Company, as agent, and the banks named therein.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in
lieu of filing a copy of such agreement, the Company
agrees to furnish a copy of such agreement to the
Commission upon request.
(g) $130,000,000 term loan agreement dated June 14, 1996,
between the Company, the Royal Bank of Canada, as
agent, and the banks named therein. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, the Company agrees to furnish
a copy of such agreement to the Commission upon
request.
Page 1 of 3
<PAGE>
(h) $150,000,000 Credit Agreement dated August 31, 1996,
between the Company, Crestar Bank, as agent, and the
banks named therein. Pursuant to Item 601(b)(4)(iii)
of Regulation S-K, in lieu of filing a copy of such
agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
(10) Material Contracts*
(a) The Company's 1988 Stock Incentive Plan, filed as
Exhibit 10(c) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1993,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(b) Amendments to the Company's 1988 Stock Incentive Plan
filed as Exhibit 10(k) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 29,
1990, (File No. 1-5767) are expressly incorporated
herein by this reference.
(c) Amendment to the Company's 1988 Stock Incentive Plan
filed as Exhibit 4(h) to the Company's Registration
Statement on Form S-8 (Registration No. 33-50144)
filed with the Commission on July 28, 1992, is
expressly incorporated herein by this reference.
(d) Amendment adopted February 20, 1997 to the Company's
1988 Stock Incentive Plan is filed herewith.
(e) The Company's Amended and Restated 1989 Non-Employee
Directors' Stock Option Plan, filed as Exhibit A to
the Company's Definitive Proxy Statement dated May
12, 1995, for the Annual Meeting of Stockholders held
on June 13, 1995, is expressly incorporated herein by
this reference.
(f) Amendment adopted April 9, 1996, to the Company's
Amended and Restated 1989 Non-Employee Directors
Stock Option Plan filed as Exhibit 10(ii) to the
Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1996 is expressly incorporated
herein by this reference.
(g) Amendment adopted February 20, 1997 to the Company's
Amended and Restated 1989 Non-Employee Directors
Stock Option Plan is filed herewith.
(h) The Company's 1994 Stock Incentive Plan, as amended
as of January 24, 1997, filed as Annex III to the
Company's Definitive Proxy Statement dated December
24, 1996, for a Special Meeting of Shareholders held
on January 24, 1997, (File No. 1-5767) is expressly
incorporated herein by this reference.
(i) Letter agreement and non-compete agreement dated
January 30, 1996, (revised February 12, 1996),
between the Company and Alan L. Wurtzel filed as
Exhibit 10(g) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1995,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(j) Employment agreement between the Company and Richard
L. Sharp dated October 17, 1986, and amendment dated
August 1, 1989, to the employment agreement, filed as
Exhibit 10(m) to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1993,
(File No. 1-5767) is expressly incorporated herein by
this reference.
(k) Employment agreement dated June 1, 1988, between the
Company and John A. Fitzsimmons, filed as Exhibit
10(n) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1989, (File No.
1-5767) is expressly incorporated hereby by this
reference.
Page 2 of 3
<PAGE>
(l) Amendment dated August 1, 1989, to employment
agreement dated June 1, 1988, between the Company and
John A. Fitzsimmons, filed as Exhibit 10(o) to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1993, (File No. 1-5767) is
expressly incorporated herein by this reference.
(m) Employment agreement dated May 25, 1989, between the
Company and Michael T. Chalifoux, filed as Exhibit
10(x) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1991, (File No.
1-5767) is expressly incorporated herein by this
reference.
(n) Employment agreement dated April 24, 1995, between
the Company and W. Alan McCollough filed as Exhibit
10(l) to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, (File No.
1-5767), is expressly incorporated herein by this
reference.
(o) Amended and restated employment agreement dated May
12, 1995, between the Company and Richard S. Birnbaum
filed as Exhibit 10(s) to the Company's Annual Report
on Form 10-K for the fiscal year ended February 28,
1995, (File No. 1-5767) is expressly incorporated
herein by this reference.
(p) The Company's Annual Performance-Based Bonus Plan, as
amended as of January 24, 1997, filed as Annex IV to
the Company's Definitive Proxy Statement dated
December 24, 1996, for a Special Meeting of
Shareholders held on January 24, 1997, (File No.
1-5767) is expressly incorporated herein by this
reference.
(q) Program for deferral of director compensation
implemented October 1995 filed as Exhibit 10(i) to
the Company's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1995, (Filed No. 1-5767)
is expressly incorporated by this reference.
(13) Annual Report to Stockholders
(21) Subsidiaries of the Company
(23) Consents of Experts and Counsel
Consent of KPMG Peat Marwick LLP to Incorporation by Reference of
Independent Auditors' Reports into the Company's Registration Statements
on Form S-8.
(24) Powers of Attorney
(27) Financial Data Schedule
* All contracts listed under Exhibit 10 are management contracts,
compensatory plans or arrangements of the Company required to be filed
as an exhibit.
Page 3 of 3
EXHIBIT 4(a)
AMENDED AND RESTATED
RIGHTS AGREEMENT
between
CIRCUIT CITY STORES, INC.
and
NORWEST BANK MINNESOTA, N.A.
Dated as of February 3, 1997
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Rights Agreement
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Certain Definitions...................................................................................2
Section 2. Appointment of Rights Agent...........................................................................5
Section 3. Issuance of Rights Certificates.......................................................................5
Section 4. Form of Rights Certificates...........................................................................7
Section 5. Countersignature and Registration.....................................................................8
Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated,
Destroyed, Lost or Stolen Rights Certificates.........................................................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.........................................9
Section 8. Cancellation and Destruction of Rights Certificates..................................................11
Section 9. Reservation and Availability of Preferred Shares and Common Shares...................................12
Section 10. Preferred Shares Record Date........................................................................14
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights
.......................................................................................................14
Section 12. Certificate of Adjusted Purchase Price or Number of Shares..........................................24
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power................................24
Section 14. Fractional Rights and Fractional Shares.............................................................26
Section 15. Rights of Action....................................................................................27
Section 16. Agreement of Right Holders..........................................................................27
Section 17. Rights Certificate Holder Not Deemed a Shareholder..................................................28
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Section 18. Concerning the Rights Agent.........................................................................28
Section 19. Merger or Consolidation or Change of Name of Rights Agent...........................................29
Section 20. Duties of Rights Agent..............................................................................29
Section 21. Change of Rights Agent..............................................................................32
Section 22. Issuance of New Rights Certificates.................................................................32
Section 23. Redemption and Termination..........................................................................33
Section 24. Exchange............................................................................................34
Section 25. Notice of Certain Events............................................................................35
Section 26. Notices.............................................................................................36
Section 27. Supplements and Amendments..........................................................................36
Section 28. Successors..........................................................................................37
Section 29. Determinations and Actions by the Board of Directors, etc...........................................37
Section 30. Benefits of this Agreement..........................................................................38
Section 31. Severability........................................................................................38
Section 32. Governing Law.......................................................................................38
Section 33. Counterparts........................................................................................38
Section 34. Descriptive Headings................................................................................38
</TABLE>
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RIGHTS AGREEMENT
This Amended and Restated Rights Agreement, is entered into as of
February 3, 1997, between Circuit City Stores, Inc. a Virginia corporation (the
"Company"), and Norwest Bank Minnesota, N.A., a national banking association
(the "Rights Agent") and successor rights agent to Crestar Bank, a Virginia
banking corporation, and shall become effective as of the Redesignation (as
defined herein).
On April 29, 1988, the Board of Directors of the Company adopted a
shareholder rights plan governed by the terms of a Rights Agreement (as amended
and restated as of March 5, 1996, the "Original Agreement") and authorized and
declared a dividend of one preferred share purchase right (an "Original Right")
for each share of Common Stock, par value $.50 per share, of the Company (the
"Common Stock") outstanding on May 9, 1988. Each Original Right represented the
right to purchase one one-hundredth (subsequently one fourhundredths as a result
of adjustments pursuant to Section 11(p) hereof) of a share of Cumulative
Participating Preferred Stock, Series E, par value $20.00 per share (the "Series
E Preferred Shares"), of the Company having the rights and preferences set forth
in the form of Articles of Amendment attached as Exhibit A to the Original
Agreement (before it was amended and restated as of March 5, 1996) and
authorized the issuance of one Original Right with respect to each share of
Common Stock that became outstanding between the Record Date and the date
hereof.
On January 24, 1997, the shareholders of the Company approved certain
amendments to the Company's Amended and Restated Articles of Incorporation (as
so amended, the "Articles of Restatement") authorizing the issuance of Circuit
City Stores, Inc. -- CarMax Group Common Stock (the "CarMax Stock") as a new
series of Common Stock and redesignating (the "Redesignation") each existing
share of Common Stock as one share of Circuit City Stores, Inc. -- Circuit City
Group Common Stock (the "Circuit City Stock").
On December 9, 1996 the Board of Directors adopted this amendment and
restatement of the Original Agreement effective upon the Redesignation (as so
amended and restated, the "Agreement") and, conditioned upon and simultaneously
with the Redesignation, redesignated each Original Right as a Circuit City Right
and authorized the issuance of one Circuit City Right and one CarMax Right with
respect to each share of Circuit City Stock and CarMax Stock, respectively, that
shall become outstanding (i) after the Redesignation and before the earliest of
the Distribution Date, the Redemption Date and the Final Expiration Date (as
such terms are defined in Sections 3 and 7 hereof) or (ii) after the
Distribution Date but before the earlier of the Redemption Date or the Final
Expiration Date, if such Common Share became outstanding (A) upon the exercise
of a stock option, (B) pursuant to any employee plan or arrangement, or (C) upon
the conversion or exchange of a security which option, plan, arrangement or
security was granted, established or issued, as the case may be, by the Company
before the Distribution Date.
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Each Circuit City Right, as so redesignated, will continue to represent
the right to purchase one four-hundredths of a Series E Preferred Share having
the rights and preferences set forth in Exhibit A-1 hereto, and each CarMax
Right will represent the right to purchase one four-hundredths of a share of
Cumulative Participating Preferred Stock, Series F, par value $20.00 per share
(the "Series F Preferred Shares"), of the Company having the rights and
preferences set forth in Exhibit A-2 hereto, in each such case upon the terms
and subject to the conditions herein set forth.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of Common Shares representing 15% or
more of the total Voting Rights of all the Common Shares then outstanding, but
shall not include the Company, any wholly-owned Subsidiary (as such term is
hereinafter defined) of the Company or any employee benefit plan of the Company
or any Subsidiary of the Company, or any Person or entity holding Common Shares
for or pursuant to the terms of any such plan.
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as in effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of
and shall be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has (A) the right to
acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding (whether or not in writing), or upon the exercise of
conversion rights, exchange rights, rights (other than these Rights),
warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the Beneficial Owner of, or to beneficially own,
(1) securities tendered pursuant to a tender or exchange offer made by
or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
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<PAGE>
exchange, (2) securities issuable upon exercise of Rights at any time
prior to the occurrence of a Triggering Event (as hereinafter defined),
or (3) securities issuable upon exercise of Rights from and after the
occurrence of a Triggering Event which Rights were acquired by such
Person or any of such Person's Affiliates or Associates prior to the
Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) hereof in connection
with an adjustment made with respect to any Original Rights; or (B) the
right to vote or dispose of or has "beneficial ownership" of (as
determined pursuant to Rule 13d-3 of the General Rules and Regulations
under the Exchange Act), including pursuant to any agreement,
arrangement or understanding (whether or not in writing); provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement, arrangement or
understanding to vote such security (1) arises solely from a revocable
proxy or consent given to such Person in response to a public proxy or
consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations of the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate thereof)
with which such Person (or any of such Person's Affiliates or
Associates) has any agreement, arrangement or understanding (whether or
not in writing) for the purpose of acquiring, holding, voting (except
to the extent contemplated by the proviso to Section 1(c)(ii)(B)), or
disposing of any securities of the Company; provided, however, that
nothing in this paragraph (iii) shall cause a person engaged in
business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such
person's participation in good faith in a firm commitment underwriting
until the expiration of forty days after the date of such acquisition.
(d) "Business Day" shall mean any day other than a Saturday,
Sunday, or a day on which banking institutions in the Commonwealth of Virginia
or the State of New York are authorized or obligated by law or executive order
to close.
(e) "CarMax Right" shall have the meaning set forth in
the fifth introductory paragraph of this Agreement.
(f) "CarMax Stock" shall have the meaning set forth in
the third introductory paragraph of this Agreement.
(g) "Circuit City Right" shall have the meaning set forth
in the fifth introductory paragraph of this Agreement.
(h) "Circuit City Stock" shall have the meaning set forth
in the third introductory paragraph of this Agreement.
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<PAGE>
(i) "Close of Business" on any given date shall mean 5:00
P.M., Richmond, Virginia time, on such date; provided, however, that if such
date is not a Business Day it shall mean 5:00 P.M., Richmond, Virginia time, on
the next succeeding Business Day.
(j) "Common Shares" when used with reference to the Company
shall mean shares of Circuit City Stock and/or CarMax Stock, as the context
requires, or any other shares of capital stock of the Company into which Circuit
City Stock or CarMax Stock shall be reclassified or changed. "Common Shares"
when used with reference to any Person other than the Company shall mean the
capital stock (or equity interest) with the greatest voting power, or having
power to control or direct the management, of such other Person or, if such
other Person is a Subsidiary of another Person, of the Person or Persons which
ultimately control such first mentioned Person.
(k) "Continuing Director" shall mean a director who was a
member of the Board of Directors of the Company on the Distribution Date or who
subsequently became a director and whose election, or nomination for election by
the Company's shareholders, was approved by a vote of a majority of Continuing
Directors on the Board of Directors of the Company on the date of such election
or nomination.
(l) "Person" shall mean any individual, firm, corporation,
partnership or other entity, and shall include any successor (by merger or
otherwise) of such entity.
(m) "Preferred Shares" shall mean the Series E Preferred
Shares and/or the Series F Preferred Shares, as the context requires, and, to
the extent there are not sufficient Series E Preferred Shares or Series F
Preferred Shares authorized to permit full exercise of the Rights, any other
series of Preferred Stock, par value $20.00 per share, of the Company designated
for such purpose containing terms substantially similar to the terms of Series E
Preferred Shares or Series F Preferred Shares, respectively.
(n) "Rights" shall mean Circuit City Rights and/or CarMax
Rights, as the context requires.
(o) "Section 11(a)(ii) Event" shall mean any event
described in Section 11(a)(ii)(A) or (B) hereof.
(p) "Section 13 Event" shall mean any event described in
clauses (i), (ii) or (iii) of Section 13(a) hereof.
(q) "Series E Preferred Shares" shall have the meaning set
forth in the fifth introductory paragraph of this Agreement.
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<PAGE>
(r) "Series F Preferred Shares" shall have the meaning set
forth in the fifth introductory paragraph of this Agreement.
(s) "Share Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) under the Exchange
Act) by the Company or an Acquiring Person that an Acquiring Person has become
such.
(t) "Subsidiary" of any Person shall mean any corporation or
other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
(u) "Triggering Event" shall mean any Section 11(a)(ii)
Event or any Section 13 Event.
(v) "Voting Rights" when used with reference to the capital
stock of, or units of equity interest in, any Person shall mean the number of
votes entitled to be cast generally in the election of directors of such Person
(if such Person is a corporation) or to participate in the management and
control of such Person (if such Person is not a corporation).
Section 2. Appointment of Rights Agent. The Company hereby
confirms the appointment of the Rights Agent to act as agent for the Company and
the holders of the Rights (who, in accordance with Section 3 hereof, shall prior
to the Distribution Date also be the holders of the Common Shares) in accordance
with the terms and conditions hereof, and the Rights Agent hereby confirms the
acceptance of such appointment. The Company may from time to time appoint such
co-Rights Agents as it may deem necessary or desirable.
Section 3. Issuance of Rights Certificates. (a) The Rights in
respect of the issued and outstanding Common Shares will be issued and become
effective on the Record Date. A Common Share and the Right or Rights issued or
to be issued hereunder in respect thereof will not be separately transferable
until the date (the "Distribution Date") which is the earlier of (i) the close
of business on the tenth day after the Share Acquisition Date (or, if the tenth
day after the Share Acquisition Date occurs before the Record Date, the close of
business on the Record Date) or (ii) the close of business on the tenth Business
Day after the date of the commencement of, or first public announcement of the
intent of any Person (other than the Company, any wholly-owned Subsidiary of the
Company or any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) to commence, a tender or exchange offer the consummation of which
would result in beneficial ownership by a Person of Common Shares representing
15% or more of the total Voting Rights of all the outstanding Common Shares
(including any such date which is after the date of this Agreement and prior to
the issuance of the Rights). Prior to the Distribution Date, each holder of
Common Shares will be the holder of the Rights associated with each such share
so held, except as otherwise provided in Section
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7(e). (A Common Share and its associated Right or Rights before the Distribution
Date shall be collectively referred to as the "Unit".) Until the Distribution
Date, the Rights issued from time to time hereunder shall be evidenced
collectively by one or more certificates (the "Rights Certificates") delivered
to and registered in the name of the Rights Agent, as Rights Agent under this
Agreement; but the issuance of the Rights hereunder shall not be affected by any
failure to deliver a new or replacement Rights Certificate to the Rights Agent
in respect thereof. The initial Rights Certificate and any additional or
replacement Rights Certificates delivered to the Rights Agent shall, prior to
the Distribution Date, have a legend set forth on the face thereof to the effect
that the Rights represented thereby shall not be exercisable until the
Distribution Date. As soon as practicable after the Company has notified the
Rights Agent of the occurrence of the Distribution Date, the Rights Agent will
send, by first-class, insured, postage prepaid mail, to each record holder of
Common Shares as of the close of business on the Distribution Date, at the
address of such holder shown on the records of the Company, a Rights
Certificate, in substantially the form of Exhibit B-1 hereto (in the case of a
Circuit City Right) or Exhibit B-2 hereto (in the case of a CarMax Right),
evidencing one Right for each Common Share so held. As of the Distribution Date,
the Rights will be evidenced solely by such Rights Certificates. The failure to
mail any such Rights Certificate shall not affect the legality or validity of
the Rights.
(b) On the Record Date or as soon as practicable thereafter,
the Company sent a copy of a Summary of Rights to Purchase Preferred Shares in
substantially the form which was attached as Exhibit C to the Original Agreement
prior to the March 5, 1996 amendment and restatement (the "Summary of Rights"),
by first-class, postage prepaid mail, to each record holder of the Company's
then-existing Common Stock as of the close of business on the Record Date, at
the address of such holder shown on the records of the Company. The failure to
send a copy of a Summary of Rights shall not affect the legality or validity of
the Rights.
(c) Certificates for Common Shares issued after the date
hereof but prior to the earliest of the Distribution Date or the Redemption Date
or the Final Expiration Date shall have impressed on, printed on, written on or
otherwise affixed to them the following legend:
The holder of this certificate is entitled to certain Rights
as set forth in an Amended and Restated Rights Agreement
between Circuit City Stores, Inc. and Norwest Bank Minnesota,
N.A. (the "Rights Agent"), dated as of ________________ as the
same may be amended or supplemented from time to time
hereafter (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is
on file at the principal executive offices of Circuit City
Stores, Inc. One or more certificates evidencing such Rights
have been delivered to and registered in the name of [INSERT
NAME OF RIGHTS AGENT], as Rights Agent under the Rights
Agreement. Circuit City Stores, Inc., will mail to the holder
of this certificate a copy of the Rights Agreement without
charge after receipt of a written request
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<PAGE>
therefor. As described in the Rights Agreement, Rights issued
to any Person who becomes an Acquiring Person (as defined in
the Rights Agreement) shall become null and void.
Section 4. Form of Rights Certificates. (a) The Rights
Certificates (and the forms of election to purchase Preferred Shares and of
assignment to be printed on the reverse thereof) shall be substantially the same
as Exhibit B-1 hereto (in the case of a Circuit City Right) or Exhibit B-2
hereto (in the case of a CarMax Right) and may have such marks of identification
or designation and such legends, summaries or endorsements printed thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any applicable law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Rights may from time to time be listed, or to
conform to usage. Subject to the provisions of Section 11 and Section 22 hereof,
the Rights Certificates, whenever issued, that are issued in respect of Common
Shares which were issued and outstanding as of the Distribution Date, shall be
dated as of the Distribution Date, and all Rights Certificates that are issued
in respect of other Common Shares shall be dated as of the respective dates of
issuance of such Common Shares, and in each such case on their face shall
entitle the holders thereof to purchase such number of one four-hundredths of a
share of Preferred Shares as shall be set forth therein at the price per one
four-hundredths of a Preferred Share set forth therein (the "Purchase Price"),
but the amount and type of securities purchasable upon the exercise of each
Right and the Purchase Price thereof shall be subject to adjustment as provided
herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 that represents Rights beneficially owned by: (i) an Acquiring Person
or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee before or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interest in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of Section 7(e), and any Rights
Certificate issued pursuant to Section 6 or Section 11 upon transfer, exchange,
replacement or adjustment of any other Rights Certificate referred to in this
sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement). Accordingly,
this Rights Certificate and the Rights represented
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hereby may become null and void in the circumstance specified
in Section 7(e) of such Agreement.
Section 5. Countersignature and Registration. The Rights
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President, any Executive Vice President, or any Senior Vice
President, and by the Secretary, an Assistant Secretary, Treasurer or an
Assistant Treasurer of the Company, either manually or by facsimile signature,
and have affixed thereto the Company's seal or a facsimile thereof. The Rights
Certificates shall not be valid for any purpose unless manually countersigned by
an authorized signatory of the Rights Agent. In case any officer of the Company
who shall have signed any of the Rights Certificates shall cease to be such
officer of the Company before countersignature by the Rights Agent and issuance
and delivery by the Company, such Rights Certificates, nevertheless, may be
countersigned by the Rights Agent, and issued and delivered by the Company with
the same force and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
The Rights Agent will keep or cause to be kept, at its
principal offices, books for registration and transfer of the Rights
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Rights Certificates, the number of Rights
evidenced on its face by each of the Rights Certificates and the date of each of
the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof,
at or prior to the close of business on the earlier of the Redemption Date or
the Final Expiration Date (as such terms are defined in Section 7 hereof), any
Rights Certificate or Rights Certificates (other than Rights Certificates
representing Rights that have become void pursuant to Section 7(e)) may be
transferred, split up, combined or exchanged for another Rights Certificate or
Rights Certificates, entitling the registered holder to purchase a like number
of one four-hundredths of a share of Preferred Shares (or, following a
Triggering Event, Common Shares, other securities, cash or other assets, as the
case may be) as the Rights Certificate or Rights Certificates surrendered then
entitled such holder (or former holder in the case of a transfer) to purchase.
Any registered holder desiring to transfer, split up, combine or exchange any
Rights Certificate shall make such request in writing delivered to the Rights
Agent, and shall surrender the Rights Certificate or Rights Certificates to be
transferred, split up, combined or exchanged at the principal office or offices
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered
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<PAGE>
holder shall have completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall request. Thereupon the Rights Agent shall, subject to Section 4(b),
Section 7(e) and Section 14 hereof, countersign and deliver to the Person
entitled thereto a Rights Certificate or Rights Certificates, as the case may
be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Rights Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will execute and deliver a new
Rights Certificate of like tenor to the Rights Agent for counter-signature and
delivery to the registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights. (a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c) and Section 11(a)(iii) hereof) in whole
or in part at any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase and the certificate on the
reverse side thereof duly executed, to the Rights Agent at the principal office
or offices of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of one
four-hundredths of a Preferred Share (or other securities, cash or other assets,
as the case may be) as to which such surrendered Rights are then exercisable, at
or prior to the earlier of (i) the close of business on April 29, 1998 (the
"Final Expiration Date"), or (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the "Redemption Date").
(b) The purchase price for each one one-hundredths of a Series
E Preferred Share pursuant to the exercise of a Circuit City Right shall
initially be $140.00 (as adjusted, the "Series E Purchase Price"). The purchase
price for each one one-hundredths of a Series F Preferred Share pursuant to the
exercise of a CarMax Right shall initially be $88.00 (as adjusted, the "Series F
Purchase Price"). The Series E Purchase Price and the Series F Purchase Price
shall be subject to adjustment from time to time as provided in Sections 11 and
13 hereof and shall be payable in accordance with paragraph (c) below.
References in this Agreement to the "Purchase Price" shall mean the Series E
Purchase Price and/or the Series F Purchase Price, as the context requires.
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(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one fourhundredths of a Preferred Share (or other
shares, securities, cash or other assets, as the case may be) to be purchased as
set forth below and an amount equal to any applicable transfer tax required to
be paid by the holder of such Rights Certificate in accordance with Section 9,
the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i)
(A) requisition from any transfer agent of the Preferred Shares (or make
available, if the Rights Agent is the transfer agent for such shares)
certificates for the total number of one four-hundredths of a Preferred Share to
be purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) if the Company shall have elected to
deposit the total number of Preferred Shares issuable upon exercise of the
Rights hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one four-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the depositary
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash, if any, to be paid in lieu of issuance of fractional
shares in accordance with Section 14, (iii) promptly after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Rights Certificate, registered in
such name or names as may be designated by such holder and (iv) when
appropriate, after receipt, promptly deliver such cash, if any, to or upon the
order of the registered holder of such Rights Certificate. The payment of the
Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii)
hereof) shall be made (x) in cash or by certified bank check or bank draft
payable to the order of the Company, or (y) at the election of the Company with
respect to all exercisable Rights by delivery of a certificate or certificates
(with appropriate stock powers executed in blank attached thereto) evidencing a
number of Common Shares equal to the then Purchase Price divided by the closing
price (as determined pursuant to Section 11(d) hereof) per Common Share on the
Trading Day (as hereinafter defined) immediately preceding the date of such
exercise or (z) in the event the Company permits payment with Common Shares, a
combination thereof. In the event the Company elects to accept Common Shares in
payment of the Purchase Price, it shall notify the Rights Agent of such election
and of the closing price per Common Share on the Trading Date immediately
preceding the date of exercise to which such election relates. In the event that
the Company is obligated to issue other securities (including Common Shares) of
the Company, pay cash and/or distribute other property pursuant to Section 11(a)
hereof, the Company will make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution by the
Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate
shall exercise fewer than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the
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registered holder of such Rights Certificate or to his duly authorized assigns,
subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such, or (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee before or concurrently
with the Acquiring Person becoming such and receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person to holders of equity interests in such Acquiring Person or to any Person
with whom the Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer that the Board
of Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall be void without any further action and any holder of such
Rights shall thereafter have no right whatsoever with respect to such Rights
(including, without limitation, the right to exercise such Rights) under any
provision of this Agreement or otherwise. No Rights Certificate shall be issued
pursuant to Section 3 that represents Rights beneficially owned by an Acquiring
Person whose Rights would be void pursuant to the preceding sentence or any
Associate or Affiliate thereof; no Rights Certificate shall be issued at any
time upon the transfer of any Rights to an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate thereof
or to any nominee of such Acquiring Person, Associate or Affiliate; and any
Rights Certificate delivered to the Rights Agent for transfer to an Acquiring
Person whose Rights would be void pursuant to the preceding sentence shall be
cancelled. The Company shall use all reasonable efforts to insure that the
provisions of this Section 7(e) and Section 4(b) are complied with, but shall
have no liability to any holder of Rights Certificates or any other Person as a
result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the form
of election to purchase set forth on the reverse side of the Rights Certificate
surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights
Certificates. All Rights Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the Company
or to any of its agents, be delivered to the
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Rights Agent for cancellation or in cancelled form, or, if surrendered to the
Rights Agent, shall be cancelled by it, and no Rights Certificates shall be
issued in lieu thereof except as expressly permitted by any of the provisions of
this Rights Agreement. The Company shall deliver to the Rights Agent for
cancellation and retirement, and the Rights Agent shall so cancel and retire,
any other Rights Certificate purchased or acquired by the Company otherwise than
upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights
Certificates to the Company.
Section 9. Reservation and Availability of Preferred Shares
and Common Shares. (a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued Preferred Shares
(and, following the occurrence of a Triggering Event, out of its authorized and
unissued Common Shares and/or other securities) the number of Preferred Shares
(and, following the occurrence of a Triggering Event, Common Shares and/or other
securities) that, as provided in this Agreement, will be sufficient to permit
the exercise in full of all outstanding Rights.
(b) So long as the Preferred Shares (and, following the
occurrence of a Triggering Event, Common Shares and/or other securities)
issuable and deliverable upon the exercise of Rights may be listed on any
national securities exchange, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable (but only to the
extent that it is reasonably likely that the Rights will be exercised), all
shares reserved for such issuance to be listed on such exchange upon official
notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined pursuant to this
Agreement (including in accordance with Section 11(a)(iii) hereof), a
registration statement under the Securities Act of 1933 (the "Act"), with
respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, (iii) cause such registration statement
to remain effective (with a prospectus at all times meeting the requirements of
the Act) until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the Final Expiration Date, and (iv)
obtain such regulatory approvals as may be necessary for it to issue securities
purchasable upon the exercise of the Rights. The Company will also take such
action as may be appropriate under, or to ensure compliance with, the securities
or "blue sky" laws of the various states in connection with the exercisability
of the Rights. The Company may temporarily suspend, for a period of time not to
exceed 90 days after the date set forth in clause (i) of the first sentence of
this Section 9(c), the exercisability of the Rights in order to prepare and file
such registration statement and permit it to become effective or to obtain any
other required regulatory approval in connection with the exercisability of the
Rights. Upon any such suspension, the Company shall issue a public announcement
stating, and notify the Rights
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Agent, that the exercisability of the Rights has been temporarily suspended, as
well as a public announcement at such time as the suspension is no longer in
effect. In addition, if the Company shall determine that a registration
statement is required following the Distribution Date, the Company may
temporarily suspend the exercisability of the Rights until such time as a
registration statement has been declared effective. In the event any Right is
exercised prior to the occurrence of a Section 11(a)(ii) Event or a Section 13
Event, the Company may defer for up to 90 days the issuance of Preferred Shares
upon such exercise in order to obtain any necessary regulatory approval. If,
within 90 days after such exercise of any Right, the Company is unable to obtain
any required regulatory approval for the issuance of the Preferred Shares, or if
the Company is otherwise unable to issue the Preferred Shares under the terms of
its Articles of Restatement or for any other reason, then the Company shall
substitute for the Preferred Shares otherwise issuable upon exercise of the
Right (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or
other equity securities of the Company, except to the extent that the Company
has not obtained any necessary regulatory approval for such issuance, (4) debt
securities of the Company, except to the extent that the Company has not
obtained any necessary regulatory approval for such issuance, (5) other assets,
or (6) any combination of the foregoing, having an aggregate value equal to the
Current Market Price (as defined in Section 11(d)(ii)) of the Preferred Shares
for which such Right is exercisable, where such aggregate value has been
determined by the Board of Directors of the Company based upon the advice of a
nationally recognized investment banking firm selected by the Board of Directors
of the Company. Notwithstanding any provision of this Agreement to the contrary,
the Rights shall not be exercisable in any jurisdiction if the requisite
qualification in such jurisdiction shall not have been obtained or the exercise
thereof shall not be permitted under applicable law.
(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all one four-hundredths of a
Preferred Share (and, following the occurrence of a Triggering Event, Common
Shares and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(e) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificate for a number of one four-hundredths of a
Preferred Share (or Common Shares and/or other securities, as the case may be)
upon the exercise of Rights. The Company shall not, however, be required to pay
any transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a person other than, or the issuance or delivery of a
number of one fourhundredths of a Preferred Share (or Common Shares and/or other
securities, as the case may be) in respect of a name other than that of, the
registered holder of the Rights Certificate evidencing Rights surrendered for
exercise or to issue or deliver any certificates for a number of one
four-hundredths of a Preferred Share (or Common Shares and/or other securities,
as the case may be) upon the exercise of any Rights until any such tax shall
have been paid (any such
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tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose
name any certificate for a number of one four-hundredths of a Preferred Share is
issued upon the exercise of Rights shall for all purposes be deemed to have
become the holder of record of the Preferred Shares (or Common Shares and/or
other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Shares (or
Common Shares and/or other securities, as the case may be) transfer books of the
Company are closed, such person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Shares (or Common
Shares and/or other securities, as the case may be) transfer books of the
Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any rights of a
shareholder of the Company with respect to shares for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights. The Purchase Price, the number and kind of shares
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on any series of the Preferred
Shares payable in Preferred Shares, (B) subdivide any series of the outstanding
Preferred Shares, (C) combine any series of the outstanding Preferred Shares
into a smaller number of Preferred Shares or (D) issue any shares of its capital
stock in a reclassification of any series of the Preferred Shares (including any
such reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive, upon payment of the Purchase Price then in effect, the aggregate number
and kind of shares of capital stock which, if such Right had been exercised
immediately prior to such date and at a time when the Preferred Shares transfer
books of the Company were open, he would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would require an adjustment under
both Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this
Section 11(a)(i)
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shall be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii).
(ii) In the event
(A) any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, at any time after the date
of this Agreement, directly or indirectly, (1) shall merge
into the Company or otherwise combine with the Company and the
Company shall be the continuing or surviving corporation of
such merger or combination and all the Common Shares of the
Company shall remain outstanding and not changed into or
exchanged for stock or other securities of any other Person or
the Company or cash or any other property, (2) shall, in one
or more transactions, transfer any assets to the Company or
any of its Subsidiaries in exchange (in whole or in part) for
shares of any class or series of capital stock of the Company
or any of its Subsidiaries or for securities exercisable for
or convertible into shares of any class or series of capital
stock of the Company or any of its Subsidiaries or otherwise
obtain from the Company or any of its Subsidiaries, with or
without consideration, any additional shares of any class or
series of capital stock of the Company or any of its
Subsidiaries or securities exercisable for or convertible into
shares of any class or series of capital stock of the Company
or any of its Subsidiaries (other than as part of a pro rata
distribution to all holders of such shares of any class or
series of capital stock of the Company or any of its
Subsidiaries), (3) shall sell, purchase, lease, exchange,
mortgage, pledge, transfer or otherwise acquire or dispose (in
one or more transactions), to, from, with or of, as the case
may be, the Company or any of its Subsidiaries, assets
(including securities) on terms and conditions less favorable
to the Company than the Company would be able to obtain in
arm's-length negotiation with an unaffiliated third party
(other than pursuant to a transaction set forth in Section
13(a) hereof), (4) shall sell, purchase, lease, exchange,
mortgage, pledge, transfer or otherwise acquire or dispose (in
one or more transactions), to, from, with or of, as the case
may be, the Company or any of the Company's Subsidiaries
(other than incidental to the lines of business, if any,
engaged in as of the date hereof between the Company and such
Acquiring Person or Associate or Affiliate) assets having an
aggregate fair market value of more than $2 million (other
than pursuant to a transaction set forth in Section 13(a)
hereof), (5) shall receive any compensation from the Company
or any of the Company's Subsidiaries other than compensation
for full-time employment as a regular employee at rates in
accordance with the Company's (or its Subsidiaries') past
practices, or (6) shall receive the benefit, directly or
indirectly (except proportionately as a shareholder and except
if resulting from a requirement of law or governmental
regulation), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax
advantage provided by the Company or any of its Subsidiaries,
or (B)
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any Person shall become the Beneficial Owner of Common Shares
representing 15% or more of the total Voting Rights of all the
Common Shares of the Company then outstanding except pursuant
to a tender offer made in the manner prescribed by Section
14(d) of the Exchange Act and the rules and regulations
promulgated thereunder; provided, however, that (a) such
tender offer shall provide for the acquisition of all of the
outstanding shares of Circuit City Stock and CarMax Stock held
by any Person other than such Acquiring Person and its
Associates or Affiliates for cash and (b) a majority of the
Continuing Directors shall have determined that such tender
offer is fair, or (C) during such time as there is an
Acquiring Person, there shall be any reclassification of
securities (including any reverse stock split), or
recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or
any other transaction or series of transactions involving the
Company or any of its Subsidiaries (whether or not with or
into or otherwise involving an Acquiring Person), other than a
transaction or transactions to which the provisions of Section
13(a) apply, which has the effect, directly or indirectly, of
increasing by more than 1% the proportionate share of the
outstanding shares of any class or series of equity securities
or of securities exercisable for or convertible into
securities of the Company or any of its Subsidiaries which is
directly or indirectly owned by any Acquiring Person or any
Associate or Affiliate of any Acquiring Person,
then, promptly following the occurrence of any event described in Section
11(a)(ii)(A), (B) or (C) hereof, proper provision shall be made so that each
holder of a Right, except as provided below and in Section 7(e), shall
thereafter have the right to receive, upon exercise thereof at the then current
Purchase Price, in accordance with the terms of this Agreement, in lieu of a
number of one four-hundredths of a Preferred Share, such number of shares of
Circuit City Stock (in the case of a Circuit City Right) or CarMax Stock (in the
case of a CarMax Right) as shall equal the result obtained by (x) multiplying
the then current Purchase Price by the then number of one four-hundredths of a
Preferred Share for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, and dividing that product (which
product, following such first occurrence, shall thereafter be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement) by (y)
50% of the Current Market Price per share of the applicable series of Common
Shares (determined pursuant to Section 11(d)) on the date of such first
occurrence (such number of shares, the "Adjustment Shares"); provided, that the
Purchase Price and the number of Adjustment Shares shall be further adjusted as
provided in this Agreement to reflect any events occurring after the date of
such first occurrence.
(iii) In the event that the aggregate number of shares of
Circuit City Stock or CarMax Stock authorized by the Company's Articles of
Restatement but not outstanding or reserved for issuance for purposes other than
upon exercise of the Rights is not sufficient to permit the exercise in full of
the Circuit City Rights or CarMax Rights, as the case may be, in
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accordance with the foregoing subparagraph (ii) of this Section 11(a), or if any
necessary regulatory approval for such issuance has not been obtained by the
Company, the Company shall: (A) determine the excess of (1) the value of the
Adjustment Shares issuable upon the exercise of each such Right (the "Current
Value") over (2) the Purchase Price (such excess, the "Spread"), and (B) with
respect to each such Right, make adequate provision to substitute for the
Adjustment Shares, upon exercise of such Rights, (1) cash, (2) a reduction in
the Purchase Price, (3) Common Shares or other equity securities of the Company
(including, without limitation, shares or units of shares of preferred stock
which the Board of Directors of the Company has deemed to have the same value as
shares of Circuit City Stock or CarMax Stock, as applicable (such shares or
units of shares of preferred stock are herein called "common stock
equivalents"), except to the extent that the Company has not obtained any
necessary regulatory approval for such issuance, (4) debt securities of the
Company, except to the extent that the Company has not obtained any necessary
regulatory approval for such issuance, (5) other assets, or (6) any combination
of the foregoing, having an aggregate value equal to the Current Value, where
such aggregate value has been determined by the Board of Directors of the
Company based upon the advice of a nationally recognized investment banking firm
selected by the Board of Directors of the Company; provided, however, if the
Company shall not have made adequate provision to deliver value pursuant to
clause (B) above within 30 days following the later of (x) the first occurrence
of a Section 11(a)(ii) Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y) being
referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company
shall be obligated, subject to Section 7(e), to deliver, upon the surrender for
exercise of each such Right and without requiring payment of the Purchase Price,
Common Shares (to the extent available), except to the extent that the Company
has not obtained any necessary regulatory approval for such issuance, and then,
if necessary, cash, which shares and/or cash have an aggregate value equal to
the Spread. If the Board of Directors of the Company shall determine in good
faith that it is likely that sufficient additional Common Shares could be
authorized for issuance upon exercise in full of such Rights or that any
necessary regulatory approval for such issuance will be obtained, the 30-day
period set forth above may be extended to the extent necessary, but not more
than 90 days after the Section 11(a)(ii) Trigger Date, in order that the Company
may seek shareholder approval for the authorization of such additional shares or
take action to obtain such regulatory approval (such period, as it may be
extended, the "Substitution Period"). To the extent that the Company determines
that some action need be taken pursuant to the first and/or second sentences of
this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding Circuit City
Rights or CarMax Rights, as the case may be, and (y) may suspend the
exercisability of such Rights until the expiration of the Substitution Period in
order to seek any authorization of additional shares, to take any action to
obtain any required regulatory approval and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of such Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii), the
value of the Common Shares
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shall be the Current Market Price (as determined pursuant to Section 11(d)
hereof) per share of the Common Shares on the Section 11(a)(ii) Trigger Date and
the value of any "common stock equivalent" shall be deemed to have the same
value as the Common Shares on such date.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of any series of
Preferred Shares entitling them (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase such Preferred Shares (or
shares having the same rights, privileges and preferences as such Preferred
Shares ("equivalent preferred shares") or securities convertible into such
Preferred Shares or equivalent preferred shares at a price per Common Share or
equivalent preferred share (or having a conversion price per share, if a
security convertible into such Preferred Shares or equivalent preferred shares)
less than the Current Market Price per share of such Preferred Shares (as
defined in Section 11(d)) on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of such Preferred Shares outstanding on
such record date plus the number of such Preferred Shares which the aggregate
offering price of the total number of such Preferred Shares or equivalent
preferred shares or both so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Current Market Price and the denominator of which shall be the number of such
Preferred Shares outstanding on such record date plus the number of additional
such Preferred Shares or equivalent preferred shares or both to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be paid
in a consideration part or all of which may be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Preferred Shares of such series owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed; and in the event that such rights or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making
of a distribution to all holders of any series of Preferred Shares (including
any such distribution made in connection with a consolidation or merger in which
the Company is the continuing corporation) of evidences of indebtedness or
assets (other than a regular quarterly cash dividend or a dividend payable in
such Preferred Shares) or subscription rights or warrants (excluding those
referred to in Section 11(b)), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the Current Market Price per share of such Preferred Shares (as defined
in Section 11(d)) on such record date, less the fair market value (as determined
in good faith by the Board of Directors of the Company,
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whose determination shall be described in a statement filed with the Rights
Agent) of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to one such
Preferred Share and the denominator of which shall be such Current Market Price
per share of such Preferred Shares. Such adjustments shall be made successively
whenever such a record date is fixed; and in the event that such distribution is
not so made, the Purchase Price shall again be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder (other
than computations made pursuant to Section 11(a)(iii) hereof), the "Current
Market Price" per share of the Common Shares on any date shall be deemed to be
the average of the daily closing prices per share of such Common Shares for the
30 consecutive Trading Days (as such term is hereinafter defined) immediately
prior to such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "Current Market Price" per share of the Common Shares on
any date shall be deemed to be the average of the daily closing prices per share
of such Common Shares for the ten consecutive Trading Days immediately following
such date; provided, however, that in the event that the Current Market Price
per share of the Common Shares is determined during a period following the
announcement by the issuer of such Common Shares of (A) a dividend or
distribution on such Common Shares payable in such Common Shares or securities
convertible into such Common Shares (other than the Rights), or (B) any
subdivision, combination or reclassification of such Common Shares, and prior to
the expiration of the requisite 30 Trading Days or ten Trading Days, as set
forth above, after the ex-dividend date for such dividend or distribution or the
record date for such subdivision, combination or reclassification, then, and in
each such case, the Current Market Price shall be appropriately adjusted to
reflect the Current Market Price per Common Share equivalent. The closing price
for each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common Shares are not listed
or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Common Shares
are listed or admitted to trading or, if the Common Shares are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then
in use, or, if on any such date the Common Shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Shares selected by the
Board of Directors of the Company. If on any such date no market maker is making
a market in the Common Shares, the fair value of such shares on such date as
determined in good faith by the Board of Directors of the Company shall be used.
The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Common Shares are listed or admitted
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to trading is open for the transaction of business or, if the Common Shares are
not listed or admitted to trading on any national securities exchange, a
Business Day. If the Common Shares are not publicly held or not so listed or
traded, "Current Market Price" per share shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
"Current Market Price" per share of the Preferred Shares shall be determined in
the same manner as set forth above for Common Shares in clause (i) of this
Section 11(d) (other than the last sentence thereof). If the Current Market
Price per share of either series of Preferred Shares cannot be determined in the
manner provided above or if either series of Preferred Shares is not publicly
held or listed or traded in a manner described in clause (i) of this Section
11(d), the "Current Market Price" per share of such series of Preferred Shares
shall be conclusively deemed to be (A) in the case of the Series E Preferred
Stock, the Current Market Price per share of the Circuit City Stock
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by 400 and (B) in the
case of the Series F Preferred Stock, the Current Market Price per share of the
CarMax (appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof), multiplied by 400. If
neither the applicable series of Common Shares nor the applicable series of
Preferred Shares are publicly held or so listed or traded, "Current Market
Price" per share shall mean the fair value per share as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be conclusive for all
purposes. For all purposes of this Agreement, the "Current Market Price" of one
four-hundredths of a Preferred Share shall be equal to the "Current Market
Price" of one Preferred Share divided by 400.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least l% in the Purchase Price; provided,
however, that any adjustments which by reason of this Section 11(e) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be made to
the nearest cent or to the nearest ten-thousandth of a Common Share or other
share or onemillionth of a Preferred Share, as the case may be. Notwithstanding
the first sentence of this Section 11(e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three years from the
date of the transaction which requires such adjustment or (ii) the date of the
expiration of the right to exercise any Rights.
(f) If, as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock of the Company
other than Preferred Shares, thereafter the number of such other shares so
receivable upon exercise of any Right and the Purchase Price thereof shall be
subject to adjustment from time to time in a manner and on terms as nearly
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equivalent as practicable to the provisions with respect to the Preferred Shares
contained in Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and
the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred
Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one four-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Section 11(b) and (c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price per one four-hundredths of a
Preferred Share, that number of one four-hundredths of a Preferred Share
(calculated to the nearest one one-millionth of a Preferred Share) obtained by
(i) multiplying (x) the number of one four-hundredths of a share covered by a
Right immediately prior to this adjustment by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price and (ii) dividing the
product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in substitution
for any adjustment in the number of one four-hundredths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment in the number of Rights shall be exercisable for the number of
one four-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement, and notify the Rights Agent, of its
election to adjust the number of Rights, indicating the record date for the
adjustment, and, if known at the time, the amount of the adjustment to be made.
This record date may be the date on which the Purchase Price is adjusted or any
day thereafter, but, if the Rights Certificates have been issued, shall be at
least ten days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights
pursuant to this Section 11(i), the Company shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates evidencing, subject to Section 14 hereof, the
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be distributed to
such holders of record in substitution and replacement for the Rights
Certificates held by such holders prior to the date of adjustment,
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and upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one four-hundredths of a Preferred Share issuable upon
the exercise of a Right, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one four-hundredths of a
share and the number of four-hundredths of a share which were expressed in the
initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one four-hundredths of the then par value, if
any, of the number of one four-hundredths of a Preferred Share issuable upon
exercise of the Rights, the Company shall take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Preferred Shares at such
adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
of the number of one four-hundredths of a Preferred Share and other capital
stock or securities of the Company, if any, issuable upon such exercise over and
above the number of one four-hundredths of a Preferred Share and other capital
stock or securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any
consolidation or subdivision of the Preferred Shares, issuance wholly for cash
of any of the Preferred Shares at less than the Current Market Price, issuance
wholly for cash of Preferred Shares or securities which by their terms are
convertible into or exchangeable for Preferred Shares, dividends on Preferred
Shares payable in Preferred Shares or issuance of rights, options or warrants
referred to in this Section 11, hereafter made by the Company to holders of its
Preferred Shares shall not be taxable to such shareholders.
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(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof), or
(iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the stockholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 27
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by the
Rights.
(p) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on any series of the outstanding Common Shares payable in
Common Shares (other than a dividend payable in shares of CarMax Stock to the
extent such dividend reduces the Number of Shares Issuable with Respect to the
Inter-Group Interest, as such term is defined in the Articles of Restatement) or
(ii) effect a subdivision, combination or consolidation of any series of the
Common Shares (by reclassification or otherwise than by payment of dividends in
Common Shares) into a greater or lesser number of Common Shares, then in any
such case (i) the number of one four-hundredths of a Series E Preferred Share
(in the case of an event affecting the Circuit City Stock) or a Series F
Preferred Share (in the case of an event affecting the CarMax Stock) purchasable
after such event upon proper exercise of each Right shall be determined by
multiplying the number of one four-hundredths of a Preferred Share so
purchasable immediately prior to such event by a fraction, the numerator of
which is the number of such Common Shares outstanding immediately before such
event and the denominator of which is the number of such Common Shares
outstanding immediately after such event and (ii) each such Common Share
outstanding immediately after such event shall have issued with respect to it
that number of Rights which each such Common Share outstanding immediately prior
to such event had issued with respect to it. The adjustments provided for in
this Section 11(p) shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected. If an event
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occurs which would require an adjustment under Section 11(a)(ii) and this
Section 11(p), the adjustments provided for in this Section 11(p) shall be in
addition and prior to any adjustment required pursuant to Section 11(a)(ii).
(q) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall redeem the shares of Circuit
City Stock or CarMax Stock in exchange for shares of common stock of one or more
subsidiaries of the Company pursuant to paragraph (B)(5)(b) of Article V, then
there shall be issued with respect to each such share of common stock of a
subsidiary delivered directly to the holders of Circuit City Stock or CarMax
Stock, as applicable, a share purchase right under a shareholder rights plan to
be established by such subsidiary.
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Sections 11 and 13
hereof, the Company shall (a) promptly prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with the transfer agent for the
Common Shares and Preferred Shares a copy of such certificate and (c) mail a
brief summary thereof to each holder of a Rights Certificate in accordance with
Section 25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power. (a) In the event that, following the Share Acquisition
Date, directly or indirectly, (i) the Company shall consolidate with, or merge
with and into, any other Person (other than a subsidiary of the Company in a
transaction which complies with Section 11(o) hereof or any employee benefit
plan of the Company, or any entity holding Common Shares for or pursuant to the
terms of any such plan) and the Company shall not be the continuing or surviving
corporation of such consolidation or merger, (ii) any Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof or any employee benefit plan of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan) shall consolidate with the
Company, or merge with and into the Company, and the Company shall be the
continuing or surviving corporation of such consolidation or merger and, in
connection with such merger, all or part of the outstanding Common Shares shall
be changed into or exchanged for stock or other securities of any other Person
(or the Company) or cash or any other property, or (iii) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one or more transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company
or any of its Subsidiaries in one or more transactions each of which complies
with Section 11(o) hereof), then, and in each such case, proper provision shall
be made so that (A) each holder of a Right (except as otherwise provided in
Section 7(e) hereof) shall thereafter have the right to receive, upon the
exercise thereof at the then current Series E Purchase Price (in the case of a
Circuit City Right) or the then current Series F Purchase Price (in the case of
a CarMax Right), in accordance with the terms of this Agreement, such number of
validly authorized and issued,
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fully paid, nonassessable and freely tradeable shares of Common Shares of the
Principal Party (as such term is hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall be equal
to the result obtained by (1) multiplying such then current Purchase Price by
the number of one four-hundredths of a Preferred Share for which such Right is
then exercisable (without taking into account any adjustment previously made
pursuant to Section 11(a)(ii)) and (2) dividing that product (which, following
the first occurrence of a Section 13 Event, shall be referred to as the
"Purchase Price" for each such Right and for all purposes of this Agreement) by
50% of the Current Market Price per share of the Common Shares of such Principal
Party on the date of consummation of such Section 13 Event; (B) such Principal
Party shall thereafter be liable for, and shall assume, by virtue of such
Section 13 Event, all the obligations and duties of the Company pursuant to this
Agreement; (C) the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of Section
11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (D) such Principal Party shall take such steps
(including, but not limited to, the reservation of a sufficient number of shares
of its Common Shares in accordance with Section 9) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its Common Shares thereafter deliverable upon the exercise of
the Rights; and (E) the provisions of Section 11(a)(ii) hereof shall be of no
effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in
clause (i) or (ii) of the first sentence of Section 13(a), the Person
that is the issuer of any securities into which Common Shares of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in
clause (iii) of the first sentence of Section 13(a), the Person that is
the party receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions; provided,
however, that in any such case, (1) if the Common Shares of such Person
are not at such time and have not been continuously over the preceding
12-month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the
Common Shares of which is and has been so registered, "Principal Party"
shall refer to such other Person; and (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common
Shares of two or more of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Shares having the greatest aggregate market value.
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<PAGE>
(c) The Company shall not consummate any Section 13 Event
unless the Principal Party shall have a sufficient number of authorized shares
of its Common Shares which have not been issued or reserved for issuance to
permit the exercise in full of the Rights in accordance with this Section 13 and
unless prior thereto the Company and such Principal Party shall have executed
and delivered to the Rights Agent a supplemental agreement providing for the
terms set forth in paragraphs (a) and (b) of this Section 13 and further
providing that, as soon as practicable after the date of any Section 13 Event,
the Principal Party will
(i) prepare and file a registration statement under
the Act, with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective as
soon as practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Act) until the
Final Expiration Date; and
(ii) will deliver to holders of the Rights historical
financial statements for the Principal Party and each of its Affiliates
which comply in all respects with the requirements for registration on
Form 10 under the Exchange Act.
The foregoing provisions set forth in this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the event
that a Section 13 Event shall occur at any time after the occurrence of a
Section 11(a)(ii) Event, the Rights which have not theretofore been exercised
shall thereafter become exercisable in the manner described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares. (a) The
Company shall not be required to issue fractions of Rights or to distribute
Rights Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Rights Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any
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such date the Rights are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Rights selected by the Board of Directors of the Company. If on
any such date no such market maker is making a market in the Rights the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
four-hundredths of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one four-hundredths of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
four-hundredths of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it, provided that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as Beneficial Owners of
the Preferred Shares. In lieu of fractional Preferred Shares the Company shall
pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one Preferred Share. For purposes of this Section 14(b),
the current market value of a Preferred Share shall be the closing price of a
Preferred Share (as determined pursuant to the second sentence of Section 11(d))
for the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right.
Section 15. Rights of Action. All rights of action in respect
to this Agreement, excepting the rights of action given to the Rights Agent
under Section 18 hereof, are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered holders
of the Common Shares); and any registered holder of any Rights Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Rights Certificate (or, prior to
the Distribution Date, of the Common Shares), may, on his own behalf and for his
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Rights Certificate in the manner
provided in such Rights Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of, the obligations of any Person subject to this Agreement.
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Section 16. Agreement of Right Holders. Every holder of a
Right, by accepting the same, consents and agrees with the Company and the
Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6 and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the person in whose name the Rights
Certificate (or, prior to the Distribution Date, the associated Common Shares
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Shares certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a
Shareholder. No holder, as such, of any Rights Certificate shall be entitled to
vote, receive dividends or be deemed for any purpose the holder of the Preferred
Shares or any other securities of the Company which may at any time be issuable
upon the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting shareholders (except as provided in Section 25), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by such Rights Certificate shall have been exercised in accordance
with the provisions hereof.
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Section 18. Concerning the Rights Agent. The Company agrees to
pay to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the acceptance, exercise and performance of
its duties hereunder. The Company also agrees to indemnify the Rights Agent for,
and to hold it harmless against, any loss, liability, or expense, incurred
without gross negligence, bad faith or willful misconduct on the part of the
Rights Agent, for anything done, suffered or omitted by the Rights Agent in
connection with the acceptance and administration of this Agreement, including
the costs and expenses of defending against any claim of liability in the
premises (including reasonable counsel fees and expenses).
The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement in reliance upon any
Rights Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of its counsel as set
forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent. Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Rights Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates shall not have been
countersigned, a successor Rights Agent may countersign such Rights Certificates
either in the name of the predecessor Rights Agent or in the name of the
successor Rights Agent; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
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countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Rights Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "Current Market Price") be proved or established by the
Company prior to taking, suffering or omitting any action hereunder, such fact
or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the President, any
Executive Vice President, any Senior Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full and complete authorization to the Rights Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own gross negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement, the
Summary of Rights or in the Rights Certificates (except its countersignature
thereof) or be required to verify the same, but all such statements and recitals
are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
or any adjustment in the terms of the Rights (including the manner, method or
amount thereof) provided for in Section 3, 11, 13 or 23, or the ascertaining of
the existence of facts that would
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require any such change or adjustment (except with respect to the exercise of
Rights evidenced by Rights Certificates after actual notice that such change or
adjustment is required); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares or other securities to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any Preferred Shares or other securities
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the President, any Executive Vice
President, any Senior Vice President, the Secretary or the Treasurer of the
Company, and to apply to such officers for advice or instructions in connection
with its duties, and it shall not be liable for any action taken, suffered or
omitted to be taken in good faith by it under the provisions of this Agreement
in reliance upon instructions of any such officer. At any time the Rights Agent
may apply to the Company for written instructions with respect to any matter
arising in connection with the Rights Agent's duties and obligations arising
under this Agreement. Such application by the Rights Agent for written
instructions from the Company may, at the option of the Rights Agent, set forth
in writing any action proposed to be taken or omitted by the Rights Agent with
respect to its duties or obligations under this Agreement and the date on and/or
after which such action shall be taken and the Rights Agent shall not be liable
for any action taken or omitted in accordance with a proposal included in any
such application on or after the date specified therein (which date shall not be
less than three Business Days after the Company receives such application,
without the Company's consent) unless, prior to taking or initiating such
action, the Rights Agent has received written instructions in response to such
application specifying the action to be taken or omitted.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting
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from any such act, default, neglect or misconduct, provided reasonable care was
exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days notice in writing mailed to the Company and to the
transfer agent of the Common Shares and Preferred Shares by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
30 days notice in writing, mailed to the Rights Agent or successor Rights Agent,
as the case may be, and to the transfer agent of the Common Shares and Preferred
Shares by registered or certified mail, and to the holders of the Rights
Certificates by first-class mail. If the Rights Agent shall resign or be removed
or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Rights Certificate
(who shall, with such notice, submit his Rights Certificate for inspection by
the Company), then the registered holder of any Rights Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights Agent.
Any successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the United
States or of the States of New York or Virginia (or of any other state of the
United States so long as such corporation is authorized to do business as a
banking institution in the States of New York or Virginia), in good standing,
having a principal office in the States of New York or Virginia, which is
authorized under such laws to exercise corporate trust powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $50 million. After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any
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such appointment the Company shall file notice thereof in writing with the
predecessor Rights Agent and the transfer agent of the Common Shares and
Preferred Shares, and mail a notice thereof in writing to the registered holders
of the Rights Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of Common Shares following the
Distribution Date and prior to the redemption or expiration of the Rights, the
Company (a) shall, with respect to Common Shares so issued or sold pursuant to
the exercise of stock options or under any employee plan or arrangement (so long
as such options, plan or arrangement were granted or established, as the case
may be, prior to the Distribution Date), or upon the exercise, conversion or
exchange of securities issued by the Company after the date hereof and prior to
the Distribution Date, and (b) may, in any other case, if deemed necessary or
appropriate by the Board of Directors of the Company, issue Rights Certificates
representing the appropriate number of Rights in connection with such issuance
or sale; provided, however, that (i) no such Rights Certificate shall be issued
if, and to the extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences to
the Company or the Persons to whom such Rights Certificate would be issued, and
(ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination. (a) The Board of
Directors of the Company may, at its option, at any time prior to the earlier of
(i) the close of business on the tenth day following the Share Acquisition Date
(or, if the Share Acquisition Date shall have occurred prior to the Record Date,
the close of business on the fifteenth day following the Record Date), or (ii)
the Final Expiration Date, redeem all but not less than all the then outstanding
Rights at a redemption price of $.0025 per Right, as such amount may be
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price") and the Company may, at its
option, pay the Redemption Price either in Common Shares (based on the "Current
Market Price," as defined in Section 11(d)(i) hereof, of the Common Shares at
the time of redemption) or cash; provided, however, if the Board of Directors of
the Company authorizes redemption of the Rights in either of the circumstances
set forth in clauses (i) and (ii) below, then there must be Continuing Directors
then in office and such authorization shall require the concurrence of a
majority of such Continuing Directors: (i) such authorization occurs on or after
the time a Person becomes an Acquiring
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Person, or (ii) such authorization occurs on or after the date of a change
(resulting from a proxy or consent solicitation) in a majority of the directors
in office at the commencement of such solicitation if any Person who is a
participant in such solicitation has stated (or, if upon the commencement of
such solicitation, a majority of the Board of Directors of the Company has
determined in good faith) that such Person (or any of its Affiliates or
Associates) intends to take, or may consider taking, any action which would
result in such Person becoming an Acquiring Person or which would cause the
occurrence of a Triggering Event.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights (such action being adopted in
the manner required by paragraph (a) above), evidence of which shall have been
filed with the Rights Agent and without any further action and without any
notice, the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price for each Right so held.
Promptly after the action of the Board of Directors ordering the redemption of
the Rights, the Company shall give notice of such redemption to the Rights Agent
and the holders of the then outstanding Rights by mailing such notice to all
such holders at each holder's last address as it appears upon the registry books
of the Rights Agent or, prior to the Distribution Date, on the registry books of
the transfer agent for the Common Shares. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
Section 24. Exchange. (a) With the affirmative vote of a
majority of the Continuing Directors, the Company may at any time after any
Person becomes an Acquiring Person, exchange all or part of the then outstanding
and exercisable Rights for Common Shares at an exchange ratio of one share of
Circuit City Stock per Circuit City Right and one share of CarMax Stock per
CarMax Right, each such ratio being appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(each such exchange ratio being hereinafter referred to as an "Exchange Ratio").
Notwithstanding the foregoing, the Company shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any such Subsidiary, or
any entity holding Common Shares for or pursuant to the terms of any such plan),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of Common Shares representing 50% or more of the total Voting
Rights of all the Common Shares of the Company then outstanding.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Circuit City
Stock or CarMax Stock, as the case may be, equal to the number of such Rights
held by such holder multiplied by the applicable Exchange Ratio. The Company
shall
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promptly give public notice of any such exchange; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Common Shares for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights held by each
holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company,
at its option, may substitute (i) Series E Preferred Shares (or equivalent
preferred shares, as such term is defined in Section 11(b) hereof) for shares of
Circuit City Stock exchangeable for Circuit City Rights, at the initial rate of
one four-hundredths of a Series E Preferred Share (or equivalent preferred
share) for each share of Circuit City Stock and (ii) Series F Preferred Shares
(or equivalent preferred shares, as such term is defined in Section 11(b)
hereof) for shares of CarMax Stock exchangeable for CarMax Rights, at the
initial rate of one four-hundredths of a Series F Preferred Share (or equivalent
preferred share) for each share of CarMax Stock, such rates, in the case of
clause (i) or (ii) of this Section 24(c), to be appropriately adjusted to
reflect adjustments in the voting rights of the Preferred Shares pursuant to the
terms thereof, so that the fraction of a Preferred Share delivered in lieu of a
Common Share shall have the same voting rights as such Common Share.
(d) In the event that there shall not be sufficient Common
Shares or Preferred Shares authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
or Preferred Shares for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Rights Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this subsection (e), the current market value of a whole Common
Share shall be the closing price of such Common Share (as determined pursuant to
the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
after the public announcement by the Company that an exchange is to be effected
pursuant to this Section 24.
Section 25. Notice of Certain Events. In case the Company
shall propose (a) to pay any dividend payable in stock of any class or series to
the holders of either series of Preferred Shares or to make any other
distribution to the holders of either series of Preferred Shares (other than a
regular quarterly cash dividend) or (b) to offer to the holders of either
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series of Preferred Shares rights or warrants to subscribe for or to purchase
any additional such Preferred Shares or shares of stock of any class or series
or any other securities, rights or options, or (c) to effect any
reclassification of either series of Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred Shares
of such series), or (d) to effect any consolidation or merger into or with any
other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), or to effect any sale or other transfer (or
to permit one or more of its Subsidiaries to effect any sale or other transfer),
in one or more transactions, of 50% or more of the assets or earning power of
the Company and its Subsidiaries (taken as a whole) to, any other Person (other
than the Company and/or any of its Subsidiaries in one or more transactions each
of which complies with Section 11(o) hereof), or (e) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (a) or (b) above at least 20 days prior
to the record date for determining holders of the Preferred Shares for purposes
of such action, and in the case of any such other action, at least 20 days prior
to the date of the taking of such proposed action or the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, whichever
shall be the earlier.
In case any Section 11(a)(ii) Event shall occur, then, in any
such case, the Company shall as soon as practicable thereafter give to each
holder of a Rights Certificate, in accordance with Section 26 hereof, a notice
of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof,
and all references in the preceding paragraph to Preferred Shares shall be
deemed thereafter references to Common Shares and/or, if appropriate, other
securities.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Circuit City Stores, Inc.
9950 Mayland Drive
Richmond, VA 23233
Attention: Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to
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or on the Rights Agent shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Company) as follows:
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
South St. Paul, Minnesota 55075
Attention: Shareowner Services
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 27, the Company may and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing Common Shares. From and after the Distribution Date and subject to
the penultimate sentence of this Section 27, the Company may and the Rights
Agent shall, if the Company so directs, supplement or amend this Agreement
without the approval of any holders of Rights Certificates in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
shorten or lengthen any time period hereunder (which lengthening or shortening,
following the first occurrence of an event set forth in clauses (i) and (ii) of
the proviso to Section 23(a) hereof, shall be effective only if there are
Continuing Directors and shall require the concurrence of a majority of such
Continuing Directors), or (iv) to change or supplement the provisions hereunder
in any manner which the Company may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Rights Certificates (other
than an Acquiring Person or an Affiliate or Associate of an Acquiring Person);
provided, this Agreement may not be supplemented or amended to lengthen,
pursuant to clause (iii) of this sentence, (A) a time period relating to when
the Rights may be redeemed at such time as the Rights are not then redeemable,
or (B) any other time period unless such lengthening is for the purpose of
protecting, enhancing or clarifying the rights of, and/or the benefits to, the
holders of Rights (other than any Acquiring Person and its Affiliates and
Associates). Upon the delivery of a certificate from an appropriate officer of
the Company which states that the proposed supplement or amendment is in
compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment. Notwithstanding anything contained in this
Agreement to the contrary, no supplement or amendment shall be made which
changes the Redemption Price, the Final Expiration Date, the Purchase Price or
the number of one four-hundredths of a Preferred Share for which a Right is
exercisable. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Shares (other than an Acquiring Person).
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Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Determinations and Actions by the Board of
Directors, etc. For all purposes of this Agreement, any calculation of the
number of Common Shares outstanding at any particular time, including for
purposes of determining the number of such outstanding Common Shares of which
any Person is the Beneficial Owner, shall be made in accordance with the last
sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the
Exchange Act. The Board of Directors of the Company (with, where specifically
provided for herein, the consent of a majority of the Continuing Directors)
shall have the exclusive power and authority to administer this Agreement and to
exercise all rights and powers specifically granted to the Board (with, where
specifically provided for herein, the consent of a majority of the Continuing
Directors) or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement) and (iii) make all factual determinations deemed necessary
or advisable for the administration of this Agreement. All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) which are done or
made by the Board in good faith, shall (x) be final, conclusive and binding on
the Company, the Rights Agent, the holders of the Rights and all other parties,
and (y) not subject the Board to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Rights Agent and the registered holders of the Rights Certificates
(and, prior to the Distribution Date, the Common Shares) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement, or any portion thereof, is held by a court of
competent jurisdiction or other authority to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement, including any portions of any thereof which are not held to be
invalid, void or unenforceable, shall remain in full force and effect and shall
in no way be affected, impaired or invalidated; provided, however, that
notwithstanding anything in this Agreement to the contrary, if any such term,
provision, covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board of Directors of the Company, with
the consent of a majority of the Continuing Directors after the Distribution
Date, determines in its good faith business judgment that severing the invalid
language from
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this Agreement would adversely affect the purpose or effect of this Agreement,
the right of redemption set forth in Section 23 hereof shall be reinstated and
shall not expire until the close of business on the tenth day following the date
of such determination by the Board of Directors.
Section 32. Governing Law. This Agreement, each Right, and
each Rights Certificate issued hereunder shall be deemed to be a contract made
under the laws of the Commonwealth of Virginia and for all purposes shall be
governed by and construed in accordance with the laws of such Commonwealth
applicable to contracts to be made and performed entirely within such
Commonwealth.
Section 33. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
-39-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
CIRCUIT CITY STORES, INC.
Attest:
By Michael T. Chalifoux By R. L. Sharp
------------------------- -------------------------
Title Senior Vice President, Title Chairman of the Board,
------------------------- ----------------------
Chief Financial Officer President
------------------------- ----------------------
NORWEST BANK MINNESOTA, N.A.
Attest:
By Kenneth Swanson By Barbara M. Novak
---------------------------- ------------------------
Title Assistant Secretary Title Vice-President
-------------------------- ---------------------
-40-
<PAGE>
EXHIBIT A-1
The Board of Directors of the Corporation has approved the following
provisions to be set forth as Section C of Article IV of the Corporation's
Articles of Restatement setting forth certain relative rights and preferences of
the Series E Preferred Shares:
C. Series E Preferred Stock.
The Board of Directors of the Corporation has heretofore designated
500,000 shares of the Preferred Stock as the Cumulative Participating Preferred
Stock, Series E ("Series E Stock"). Such number may from time to time be
decreased (but not below the number of shares of Series E Stock then
outstanding) by the Board of Directors of the Corporation. In addition to any
relative rights and preferences hereinabove granted, the relative rights and
preferences of such series and the holders of the outstanding shares thereof are
as set forth in paragraphs (C)(1) through (C)(5) of this Article.
(1) Dividends and Distributions.
(a) The holders of shares of the Series E Stock, in preference
to the holders of shares of the Circuit City Stock and the CarMax Stock
and of any other junior stock, shall be entitled to receive, when, as
and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the
fifteenth day (or, if not a business day, the preceding business day)
of January, April, July and October in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing
on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of the Series E Stock, in an amount
per share (rounded to the nearest cent) equal to the greater of (a)
$1.00 or (b) subject to the provision for adjustment hereinafter set
forth, 400 times the aggregate per share amount of all cash dividends,
and 400 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend
payable in shares of Circuit City Stock, or a subdivision of the
outstanding shares of Circuit City Stock (by reclassification or
otherwise), declared on the Circuit City Stock since the immediately
preceding Quarterly Dividend Payment Date or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any share
or fraction of a share of the Series E Stock. In the event the
Corporation shall at any time after January 1, 1997 declare or pay any
dividend on Circuit City Stock payable in shares of Circuit City Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Circuit City Stock (by reclassification or
otherwise than by payment of a dividend in shares of Circuit City
Stock) into a greater or lesser number of shares of Circuit City Stock,
then in each such case the amount per share to which holders of shares
of the Series E Stock shall be entitled under clause (b) of the
preceding sentence shall be adjusted by multiplying the amount per
share to which
A-1-1
<PAGE>
holders of shares of the Series E Stock were entitled immediately prior
to such event under clause (b) of the preceding sentence by a fraction
the numerator of which is the number of shares of Circuit City Stock
outstanding immediately after such event and the denominator of which
is the number of shares of Circuit City Stock that were outstanding
immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution
on the Series E Stock as provided in paragraph (C)(1)(a) of this
Article immediately after it declares a dividend or distribution on the
Circuit City Stock (other than a dividend payable in shares of Circuit
City Stock); provided that, in the event no dividend or distribution
shall have been declared on the Circuit City Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the
Series E Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of the Series E Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of the
Series E Stock, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the
determination of holders of shares of the Series E Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid on the
shares of the Series E Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of the Series E Stock entitled
to receive payment of a dividend or distribution declared thereon,
which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
(2) Voting Rights. Except to the extent provided by law, the
holders of shares of the Series E Stock shall not be entitled (i) to vote on any
matter or (ii) to receive notice of, or to participate in, any meeting of
shareholders of the Corporation at which they are not entitled to vote.
(3) Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series E Stock as provided in paragraph
(C)(1) of this Article are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not
A-1-2
<PAGE>
declared, on shares of the Series E Stock outstanding shall have been
paid in full, the Corporation shall not:
(i) declare, set apart or pay dividends on or make
any other distributions on the Common Stock or any shares of
stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series E Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series E Stock, except dividends paid
ratably on the Series E Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled; or
(iii) redeem or purchase or otherwise acquire for
consideration shares of the Series E Stock, any such parity
stock or any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) with the Series E
Stock, or set aside for or pay to any sinking fund therefor.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (C)(3)(a) of this Article, purchase or otherwise acquire such
shares at such time and in such manner.
(4) Reacquired Shares. Any shares of the Series E Stock
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, par value $20.00 per share, and may be
reissued as a new series or a part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors or as part of an
existing series of Preferred Stock.
(5) Redemption.
(a) The Corporation may, at its option and at any time and
from time to time after April 29, 2048, redeem all or any portion of
the outstanding shares of Series E Stock.
(b) The redemption price shall be an amount per share equal to
the greater of (i) $14,000 or (ii) subject to the provision for
adjustment hereinafter set forth, 400 times the current market price
per share of Circuit City Stock on the date fixed for redemption, plus
in each such case an amount equal to accrued and unpaid dividends
A-1-3
<PAGE>
and distributions thereon, whether or not declared, to the date fixed
for redemption. The current market price per share of Circuit City
Stock on any date shall be deemed to be the average of the daily
closing prices per share of such Circuit City Stock for the 30
consecutive trading days immediately prior to such date. The closing
price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange
("NYSE") or, if the Common Stock is not listed or admitted to trading
on the NYSE, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which the Circuit City Stock is listed
or admitted to trading or, if the Circuit City Stock is not listed or
admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations
Systems ("NASDAQ") or such other system then in use, or, if on any such
date the Circuit City Stock is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Circuit City Stock. If
no professional market maker is then making a market in the Circuit
City Stock, the current market price per share of the Circuit City
Stock shall be deemed to be $1.00. As used herein, the term trading day
shall mean a day on which the principal national securities exchange on
which the Circuit City Stock is listed or admitted to trading is open
for the transaction of business or, if the Circuit City Stock is not
listed or admitted to trading on any national securities exchange, a
business day. In the event the Corporation shall at any time after
January 1, 1997 declare or pay any dividend on Common Stock payable in
shares of Circuit City Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Circuit City Stock) into a greater or lesser number of shares of
Circuit City Stock, then in each such case the aggregate amount per
share to which holders of shares of the Series E Stock shall be
entitled under the provisions of the first sentence of this paragraph
shall be adjusted by multiplying the amount per share to which holders
of shares of the Series E Stock should have been entitled immediately
prior to such event under the provisions of the first sentence of this
paragraph by a fraction the numerator of which is the number of shares
of Circuit City Stock outstanding immediately after such event and the
denominator of which is the number of shares of Circuit City Stock that
were outstanding immediately prior to such event.
(c) In case less than all of the outstanding shares of Series
E Stock are to be redeemed, not more than 60 days prior to the date
fixed for redemption the Corporation shall select the shares to be
redeemed. Such shares shall be selected by lot or designated ratably or
in such other equitable manner as the Corporation may determine. The
Corporation in its discretion may select the particular certificates
(if there are more
A-1-4
<PAGE>
than one) representing shares registered in the name of a holder that
are to be redeemed.
(d) Not less than 30 nor more than 60 days prior to the date
fixed for redemption, notice of redemption shall be given by first
class mail, postage prepaid, to the holders of record of the
outstanding shares of the Series E Stock to be redeemed at their last
known addresses shown in the Corporation's share transfer records. The
notice of redemption shall set forth the paragraph of this Article
pursuant to which the shares are being redeemed, the number of shares
to be redeemed, the date fixed for redemption, the applicable
redemption price, and the place or places where certificates
representing shares to be redeemed may be surrendered. In case less
than all of the outstanding shares of the Series E Stock are to be
redeemed the notice of redemption shall also set forth the numbers of
the certificates representing shares to be redeemed and, in case less
than all shares represented by any such certificate are to be redeemed,
the number of shares represented by such certificate to be redeemed.
(e) If notice of redemption of any outstanding shares of
Series E Stock shall have been duly mailed as herein provided, then on
or before the date fixed for redemption the Corporation shall deposit
cash sufficient to pay the redemption price of such shares in trust for
the benefit of the holders of the shares to be redeemed with any bank
or trust company in the City of Richmond, Commonwealth of Virginia,
having capital and surplus aggregating at least $50,000,000 as of the
date of its most recent report of financial condition and named in such
notice, to be applied to the redemption of the shares so called for
redemption against surrender for cancellation of the certificates
representing such shares. From and after the time of such deposit all
shares for the redemption of which such deposit shall have been made
shall, whether or not the certificates therefor shall have been
surrendered for cancellation, no longer be deemed to be outstanding for
any purpose, and all rights with respect to such shares shall thereupon
cease and terminate except the right to receive payment of redemption
price but without interest. Any interest earned on funds so deposited
shall be paid to the Corporation from time to time. Any funds so
deposited and unclaimed at the end of five years from the date fixed
for redemption shall be repaid to the Corporation, free of trust, and
the holders of the shares called for redemption who shall not have
surrendered their certificates representing such shares prior to such
repayment shall be deemed to be unsecured creditors of the Corporation
for the amount of the redemption price and shall look only to the
Corporation for payment thereof, without interest, subject to the laws
of the Commonwealth of Virginia.
(f) The Corporation shall also have the right to acquire
outstanding shares of Series E Stock otherwise than by redemption
pursuant to paragraph (C)(5)(a) of this Article, from time to time for
such consideration as may be acceptable to the holders thereof;
provided, however, that if all dividends accrued on all outstanding
shares of Series E Stock shall not have been declared and paid or
declared and a sum sufficient
A-1-5
<PAGE>
for the payment thereof set apart, neither the Corporation nor any
subsidiary shall so acquire any shares of Series E Stock except in
accordance with a purchase offer made on the same terms to all the
holders of the outstanding shares of Series E Stock.
A-1-6
<PAGE>
EXHIBIT A-2
The Board of Directors of the Corporation has approved the following
provisions to be set forth as Section D of Article IV of the Corporation's
Articles of Restatement setting forth certain relative rights and preferences of
the Series F Preferred Shares:
D. Series F Preferred Stock.
The Board of Directors of the Corporation has heretofore designated
500,000 shares of the Preferred Stock as the Cumulative Participating Preferred
Stock, Series F ("Series F Stock"). Such number may from time to time be
decreased (but not below the number of shares of Series F Stock then
outstanding) by the Board of Directors of the Corporation. In addition to any
relative rights and preferences hereinabove granted, the relative rights and
preferences of such series and the holders of the outstanding shares thereof are
as set forth in paragraphs (D)(1) through (D)(5) of this Article.
(1) Dividends and Distributions.
(a) The holders of shares of the Series F Stock, in preference
to the holders of shares of the Circuit City Stock and the CarMax Stock
and of any other junior stock, shall be entitled to receive, when, as
and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the
fifteenth day (or, if not a business day, the preceding business day)
of January, April, July and October in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing
on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of the Series F Stock, in an amount
per share (rounded to the nearest cent) equal to the greater of (a)
$1.00 or (b) subject to the provision for adjustment hereinafter set
forth, 400 times the aggregate per share amount of all cash dividends,
and 400 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend
payable in shares of CarMax Stock, or a subdivision of the outstanding
shares of CarMax Stock (by reclassification or otherwise), declared on
the CarMax Stock since the immediately preceding Quarterly Dividend
Payment Date or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of
the Series F Stock. In the event the Corporation shall at any time
after January 1, 1997 declare or pay any dividend on CarMax Stock
payable in shares of CarMax Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of CarMax Stock
(by reclassification or otherwise than by payment of a dividend in
shares of CarMax Stock) into a greater or lesser number of shares of
CarMax Stock, then in each such case the amount per share to which
holders of shares of the Series F Stock shall be entitled under clause
(b) of the preceding sentence shall be adjusted by multiplying the
amount per share to which holders of shares of the
A-2-1
<PAGE>
Series F Stock were entitled immediately prior to such event under
clause (b) of the preceding sentence by a fraction the numerator of
which is the number of shares of CarMax Stock outstanding immediately
after such event and the denominator of which is the number of shares
of CarMax Stock that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution
on the Series F Stock as provided in paragraph (D)(1)(a) of this
Article immediately after it declares a dividend or distribution on the
CarMax Stock (other than a dividend payable in shares of CarMax Stock);
provided that, in the event no dividend or distribution shall have been
declared on the CarMax Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1.00 per share on the Series F Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of the Series F Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of the
Series F Stock, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the
determination of holders of shares of the Series F Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid on the
shares of the Series F Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at
the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of the Series F Stock entitled
to receive payment of a dividend or distribution declared thereon,
which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
(2) Voting Rights. Except to the extent provided by law, the
holders of shares of the Series F Stock shall not be entitled (i) to vote on any
matter or (ii) to receive notice of, or to participate in, any meeting of
shareholders of the Corporation at which they are not entitled to vote.
(3) Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series F Stock as provided in paragraph
(C)(1) of this Article are in arrears, thereafter and until all accrued
and unpaid dividends and distributions, whether or not
A-2-2
<PAGE>
declared, on shares of the Series F Stock outstanding shall have been
paid in full, the Corporation shall not:
(i) declare, set apart or pay dividends on or make
any other distributions on the Common Stock or any shares of
stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series F Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series F Stock, except dividends paid
ratably on the Series F Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled; or
(iii) redeem or purchase or otherwise acquire for
consideration shares of the Series F Stock, any such parity
stock or any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) with the Series F
Stock, or set aside for or pay to any sinking fund therefor.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (D)(3)(a) of this Article, purchase or otherwise acquire such
shares at such time and in such manner.
(4) Reacquired Shares. Any shares of the Series F Stock
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, par value $20.00 per share, and may be
reissued as a new series or a part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors or as part of an
existing series of Preferred Stock.
(5) Redemption.
(a) The Corporation may, at its option and at any time and
from time to time after April 29, 2048, redeem all or any portion of
the outstanding shares of Series F Stock.
(b) The redemption price shall be an amount per share equal to
the greater of (i) $8,800 or (ii) subject to the provision for
adjustment hereinafter set forth, 400 times the current market price
per share of CarMax Stock on the date fixed for redemption, plus in
each such case an amount equal to accrued and unpaid dividends
A-2-2
<PAGE>
and distributions thereon, whether or not declared, to the date fixed
for redemption. The current market price per share of CarMax Stock on
any date shall be deemed to be the average of the daily closing prices
per share of such CarMax Stock for the 30 consecutive trading days
immediately prior to such date. The closing price for each day shall be
the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange ("NYSE") or, if the
Common Stock is not listed or admitted to trading on the NYSE, as
reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities
exchange on which the CarMax Stock is listed or admitted to trading or,
if the CarMax Stock is not listed or admitted to trading on any
national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the
over-the counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotations Systems ("NASDAQ") or
such other system then in use, or, if on any such date the CarMax Stock
is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a
market in the CarMax Stock. If no professional market maker is then
making a market in the CarMax Stock, the current market price per share
of the CarMax Stock shall be deemed to be $1.00. As used herein, the
term trading day shall mean a day on which the principal national
securities exchange on which the CarMax Stock is listed or admitted to
trading is open for the transaction of business or, if the CarMax Stock
is not listed or admitted to trading on any national securities
exchange, a business day. In the event the Corporation shall at any
time after January 1, 1997 declare or pay any dividend on Common Stock
payable in shares of CarMax Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock
(by reclassification or otherwise than by payment of a dividend in
shares of CarMax Stock) into a greater or lesser number of shares of
CarMax Stock, then in each such case the aggregate amount per share to
which holders of shares of the Series F Stock shall be entitled under
the provisions of the first sentence of this paragraph shall be
adjusted by multiplying the amount per share to which holders of shares
of the Series F Stock should have been entitled immediately prior to
such event under the provisions of the first sentence of this paragraph
by a fraction the numerator of which is the number of shares of CarMax
Stock outstanding immediately after such event and the denominator of
which is the number of shares of CarMax Stock that were outstanding
immediately prior to such event.
(c) In case less than all of the outstanding shares of Series
F Stock are to be redeemed, not more than 60 days prior to the date
fixed for redemption the Corporation shall select the shares to be
redeemed. Such shares shall be selected by lot or designated ratably or
in such other equitable manner as the Corporation may determine. The
Corporation in its discretion may select the particular certificates
(if there are more
A-2-3
<PAGE>
than one) representing shares registered in the name of a holder that
are to be redeemed.
(d) Not less than 30 nor more than 60 days prior to the date
fixed for redemption, notice of redemption shall be given by first
class mail, postage prepaid, to the holders of record of the
outstanding shares of the Series F Stock to be redeemed at their last
known addresses shown in the Corporation's share transfer records. The
notice of redemption shall set forth the paragraph of this Article
pursuant to which the shares are being redeemed, the number of shares
to be redeemed, the date fixed for redemption, the applicable
redemption price, and the place or places where certificates
representing shares to be redeemed may be surrendered. In case less
than all of the outstanding shares of the Series F Stock are to be
redeemed the notice of redemption shall also set forth the numbers of
the certificates representing shares to be redeemed and, in case less
than all shares represented by any such certificate are to be redeemed,
the number of shares represented by such certificate to be redeemed.
(e) If notice of redemption of any outstanding shares of
Series F Stock shall have been duly mailed as herein provided, then on
or before the date fixed for redemption the Corporation shall deposit
cash sufficient to pay the redemption price of such shares in trust for
the benefit of the holders of the shares to be redeemed with any bank
or trust company in the City of Richmond, Commonwealth of Virginia,
having capital and surplus aggregating at least $50,000,000 as of the
date of its most recent report of financial condition and named in such
notice, to be applied to the redemption of the shares so called for
redemption against surrender for cancellation of the certificates
representing such shares. From and after the time of such deposit all
shares for the redemption of which such deposit shall have been made
shall, whether or not the certificates therefor shall have been
surrendered for cancellation, no longer be deemed to be outstanding for
any purpose, and all rights with respect to such shares shall thereupon
cease and terminate except the right to receive payment of redemption
price but without interest. Any interest earned on funds so deposited
shall be paid to the Corporation from time to time. Any funds so
deposited and unclaimed at the end of five years from the date fixed
for redemption shall be repaid to the Corporation, free of trust, and
the holders of the shares called for redemption who shall not have
surrendered their certificates representing such shares prior to such
repayment shall be deemed to be unsecured creditors of the Corporation
for the amount of the redemption price and shall look only to the
Corporation for payment thereof, without interest, subject to the laws
of the Commonwealth of Virginia.
(f) The Corporation shall also have the right to acquire
outstanding shares of Series F Stock otherwise than by redemption
pursuant to paragraph (D)(5)(a) of this Article, from time to time for
such consideration as may be acceptable to the holders thereof;
provided, however, that if all dividends accrued on all outstanding
shares of Series F Stock shall not have been declared and paid or
declared and a sum sufficient
A-2-4
<PAGE>
for the payment thereof set apart, neither the Corporation nor any
subsidiary shall so acquire any shares of Series F Stock except in
accordance with a purchase offer made on the same terms to all the
holders of the outstanding shares of Series F Stock.
A-2-5
<PAGE>
Exhibit B-1
[Form of Rights Certificate]
Certificate No. CCR-__________ Rights
NOT EXERCISABLE [BEFORE THE DISTRIBUTION DATE (AS SUCH TERM IS DEFINED
IN THE RIGHTS AGREEMENT) OR]* AFTER April 29, 1998 OR EARLIER IF NOTICE OF
REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT ON
THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS
BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS
REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH
AGREEMENT.]**
Circuit City Group Rights Certificate
Circuit City Stores, Inc.
- --------
*This portion of the legend in brackets shall be inserted only upon the
Rights Certificates delivered to the Rights Agent prior to the Distribution
Date.
**This portion of the legend in brackets shall be inserted only if
applicable and shall replace the immediately preceding sentence.
B-1-1
<PAGE>
This certifies that _______________ , or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Amended and Restated Rights Agreement dated as of February ___, 1997 (the
"Rights Agreement") between Circuit City Stores, Inc., a Virginia corporation
(the "Company"), and Norwest Bank Minnesota, N.A., a national banking
association (Norwest Bank Minnesota, N.A. or its successor as rights agent under
the Rights Agreement, the "Rights Agent"), to purchase from the Company at any
time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M. (Richmond, Virginia time) on April 29, 1998
(the "Final Expiration Date") at the principal office or offices of the Rights
Agent designated for such purpose, or at its successor as Rights Agent, one
four-hundredths of a fully paid nonassessable share of Cumulative Participating
Preferred Stock, Series E, par value $20.00 per share (the "Preferred Shares"),
of the Company, at a purchase price of $35.00 per one four-hundredths of a
Preferred Share (the "Purchase Price"), upon presentation and surrender of this
Rights Certificate with the Form of Election to Purchase duly executed. The
Purchase Price shall be paid in cash or, if the Company so permits, Common
Shares having an equivalent value or, if the Company has permitted payment with
Common Shares, a combination of cash and Common Shares. The number of Rights
evidenced by this Rights Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Purchase Price per
share set forth above, are the number and Purchase Price as of February ___,
1997, based on the Preferred Shares as constituted at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term
is defined in the Rights Agreement), if the Rights evidenced by this Right
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, concurrently with or after such
transfer, became an Acquiring Person or an Affiliate or Associate of an
Acquiring Person, such Rights shall become null and void and no holder hereof
shall have any right with respect to such Rights from and after the occurrence
of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and
the number and kind of Preferred Shares or other securities which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events (as such term is defined in the Rights Agreement).
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Rights
B-1-2
<PAGE>
Certificates which limitations of rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in the
Rights Agreement. Copies of the Rights Agreement are on file at the principal
offices of the Company and are also available upon written request to the
Company.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the office or offices of the Rights Agent
designated for such purpose, may be exchanged for another Rights Certificate or
Rights Certificates of like tenor and date evidencing Rights entitling the
holder to purchase a like aggregate number of one fourhundredths of a Preferred
Share as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option, with
the approval of a majority of the Continuing Directors (as such term is defined
in the Rights Agreement), at a redemption price of $.0025 per Right, payable, at
the option of the Company, in cash or Common Shares, at any time prior to the
earlier of the close of business on (i) the tenth day (as such time period may
be extended or shortened pursuant to the Rights Agreement) following the Share
Acquisition Date (as such term is defined in the Rights Agreement) and (ii) the
Final Expiration Date.
No fractional Preferred Shares will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one fourhundredths of a Preferred Share, which may, at the
election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
B-1-3
<PAGE>
WITNESS the facsimile signatures of the proper officers of the
Company and its corporate seal. Dated as of:
ATTEST: CIRCUIT CITY STORES, INC.
______________________________ By: _________________________
Title: Title:
Countersigned:
[INSERT NAME OF RIGHTS AGENT]
By__________________________________
Authorized Signature
B-1-4
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Rights Certificates.)
FOR VALUE RECEIVED _____________________________ hereby sells,
assigns and transfers unto
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________ Attorney,
to transfer the withinnamed Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated:___________ 19 ______________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and credit
unions with membership in an approved signature guarantee Medallion program),
pursuant to SEC Rule 17Ad-15.
Certificate
The undersigned hereby certifies by checking the appropriate boxes that: (i)
this Rights Certificate [ ] is [ ] is not being sold, assigned or transferred by
or on behalf of a Person who is or was an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined pursuant to
the Rights Agreement); and (ii) after due inquiry and to the best knowledge of
the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of an Acquiring Person.
B-1-5
<PAGE>
Dated: ______________, 19 _____________________________
Signature
B-1-6
<PAGE>
Notices
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-1-7
<PAGE>
[Form of Reverse Side of Rights Certificate -- continued]
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Rights
Certificate.)
To: Circuit City Stores, Inc.
The undersigned hereby irrevocably elects to exercise
__________________________ Rights represented by this Rights Certificate to
purchase the Preferred Shares issuable upon the exercise of the Rights (or such
other securities of the Company or of any other person which may be issuable
upon the exercise of the Rights) and requests that certificates for such shares
be issued in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number
(Please print name and address)
Dated:_______________, 19 ______________________________
Signature
(Signature must conform in
all respects to name of
holder as specified on the
face of this Rights
Certificate in every
particular, without
alteration or enlargement
or any change whatsoever)
B-1-8
<PAGE>
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and credit
unions with membership in an approved signature guarantee Medallion program),
pursuant to SEC Rule 17Ad-15.
Dated: ____________ , 19 _____________________________
Signature
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
1. the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
2. after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated: _____________, 19 _____________________________
Signature
B-1-9
<PAGE>
Notice
The signature to the foregoing Election must correspond to the name as
written upon the face of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.
B-1-10
<PAGE>
Exhibit B-2
[Form of Rights Certificate]
Certificate No. CMR-__________ Rights
NOT EXERCISABLE [BEFORE THE DISTRIBUTION DATE (AS SUCH TERM IS DEFINED
IN THE RIGHTS AGREEMENT) OR]*** AFTER April 29, 1998 OR EARLIER IF NOTICE OF
REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT ON
THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS
BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS
REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH
AGREEMENT.]****
CarMax Group Rights Certificate
Circuit City Stores, Inc.
This certifies that _______________ , or registered assigns,
is the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof,
- --------
***This portion of the legend in brackets shall be inserted only upon the
Rights Certificates delivered to the Rights Agent prior to the Distribution
Date.
****This portion of the legend in brackets shall be inserted only if
applicable and shall replace the immediately preceding sentence.
B-2-1
<PAGE>
subject to the terms, provisions and conditions of the Amended and Restated
Rights Agreement dated as of February ___, 1997 (the "Rights Agreement") between
Circuit City Stores, Inc., a Virginia corporation (the "Company"), and Norwest
Bank Minnesota, N.A., a national banking association (Norwest Bank Minnesota,
N.A. or its successor as rights agent under the Rights Agreement, the "Rights
Agent"), to purchase from the Company at any time after the Distribution Date
(as such term is defined in the Rights Agreement) and prior to 5:00 P.M.
(Richmond, Virginia time) on April 29, 1998 (the "Final Expiration Date") at the
principal office or offices of the Rights Agent designated for such purpose, or
at its successor as Rights Agent, one four-hundredths of a fully paid
nonassessable share of Cumulative Participating Preferred Stock, Series F, par
value $20.00 per share (the "Preferred Shares"), of the Company, at a purchase
price of $22.00 per one four-hundredths of a Preferred Share (the "Purchase
Price"), upon presentation and surrender of this Rights Certificate with the
Form of Election to Purchase duly executed. The Purchase Price shall be paid in
cash or, if the Company so permits, Common Shares having an equivalent value or,
if the Company has permitted payment with Common Shares, a combination of cash
and Common Shares. The number of Rights evidenced by this Rights Certificate
(and the number of shares which may be purchased upon exercise thereof) set
forth above, and the Purchase Price per share set forth above, are the number
and Purchase Price as of February ___, 1997, based on the Preferred Shares as
constituted at such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term
is defined in the Rights Agreement), if the Rights evidenced by this Right
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, concurrently with or after such
transfer, became an Acquiring Person or an Affiliate or Associate of an
Acquiring Person, such Rights shall become null and void and no holder hereof
shall have any right with respect to such Rights from and after the occurrence
of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and
the number and kind of Preferred Shares or other securities which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events (as such term is defined in the Rights Agreement).
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Rights Certificates
which limitations of rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in the
Rights Agreement. Copies of
B-2-2
<PAGE>
the Rights Agreement are on file at the principal offices of the Company and are
also available upon written request to the Company.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the office or offices of the Rights Agent
designated for such purpose, may be exchanged for another Rights Certificate or
Rights Certificates of like tenor and date evidencing Rights entitling the
holder to purchase a like aggregate number of one fourhundredths of a Preferred
Share as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option, with
the approval of a majority of the Continuing Directors (as such term is defined
in the Rights Agreement), at a redemption price of $.0025 per Right, payable, at
the option of the Company, in cash or Common Shares, at any time prior to the
earlier of the close of business on (i) the tenth day (as such time period may
be extended or shortened pursuant to the Rights Agreement) following the Share
Acquisition Date (as such term is defined in the Rights Agreement) and (ii) the
Final Expiration Date.
No fractional Preferred Shares will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one fourhundredths of a Preferred Share, which may, at the
election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
B-2-3
<PAGE>
WITNESS the facsimile signatures of the proper officers of the
Company and its corporate seal. Dated as of:
ATTEST: CIRCUIT CITY STORES, INC.
______________________________ By: __________________
Title: Title:
Countersigned:
[INSERT NAME OF RIGHTS AGENT]
By__________________________________
Authorized Signature
B-2-4
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Rights Certificates.)
FOR VALUE RECEIVED _____________________________ hereby sells,
assigns and transfers unto
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________ Attorney,
to transfer the withinnamed Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated:___________ 19 ______________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and credit
unions with membership in an approved signature guarantee Medallion program),
pursuant to SEC Rule 17Ad-15.
Certificate
The undersigned hereby certifies by checking the appropriate boxes that: (i)
this Rights Certificate [ ] is [ ] is not being sold, assigned or transferred by
or on behalf of a Person who is or was an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined pursuant to
the Rights Agreement); and (ii) after due inquiry and to the best knowledge of
the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of an Acquiring Person.
B-2-5
<PAGE>
Dated: ______________, 19 _____________________________
Signature
B-2-6
<PAGE>
Notices
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-2-7
<PAGE>
[Form of Reverse Side of Rights Certificate -- continued]
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Rights
Certificate.)
To: Circuit City Stores, Inc.
The undersigned hereby irrevocably elects to exercise
__________________________ Rights represented by this Rights Certificate to
purchase the Preferred Shares issuable upon the exercise of the Rights (or such
other securities of the Company or of any other person which may be issuable
upon the exercise of the Rights) and requests that certificates for such shares
be issued in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number
(Please print name and address)
Dated:_______________, 19 ______________________________
Signature
(Signature must conform in
all respects to name of
holder as specified on the
face of this Rights
Certificate in every
particular, without
alteration or enlargement
or any change whatsoever)
B-2-8
<PAGE>
Signature Guaranteed:
Signatures must be guaranteed by an eligible guarantor
institution (banks, stockbrokers, savings and loan associations and credit
unions with membership in an approved signature guarantee Medallion program),
pursuant to SEC Rule 17Ad-15.
Dated: ____________ , 19 _____________________________
Signature
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
1. the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
2. after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated: _____________, 19 _____________________________
Signature
B-2-9
<PAGE>
Notice
The signature to the foregoing Election must correspond to the name as
written upon the face of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.
B-2-10
Exhibit 10(d)
Amendment to 1988 Stock Incentive Plan
The following resolution relating to the 1988 Stock Incentive Plan was adopted
by the Board of Directors of Circuit City Stores, Inc. at its meeting on
February 20, 1997:
RESOLVED that Section 2(e) of the 1988 Stock Incentive Plan . . . are
hereby amended to change the references therein to "Common Stock" or
"common stock of the Company" to read "Circuit City Stores, Inc.--Circuit
City Group Common Stock."
Exhibit 10(g)
Amendment to Amended and Restated 1989 Non-Employee Directors Stock Option Plan
The following resolution relating to the Amended and Restated 1989 Non-Employee
Directors Stock Option Plan was adopted by the Board of Directors of Circuit
City Stores, Inc. at its meeting on February 20, 1997:
RESOLVED, that . . . Section 4 of the 1989 Directors Plan . . . are hereby
amended to change the references therein to "Common Stock" or "common stock of
the Company" to read "Circuit City Stores, Inc.--Circuit City Group Common
Stock."
<TABLE>
<S> <C>
REPORTED HISTORICAL INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues................ $7,663,811 $7,029,123 $5,582,947 $4,130,415 $3,269,769
Net earnings.................................... $ 136,414 $ 179,375 $ 167,875 $ 132,400 $ 110,250
Net earnings (loss) per share:
Circuit City Group common stock.............. $ 1.38 $ 1.82 $ 1.72 $ 1.36 $ 1.15
CarMax Group common stock.................... $ (0.01) $ - $ - $ - $ -
Total assets.................................... $3,081,173 $2,526,022 $2,004,055 $1,554,664 $1,262,930
Long-term debt, excluding current installments.. $ 430,290 $ 399,161 $ 178,605 $ 29,648 $ 82,387
Deferred revenue and other liabilities.......... $ 166,295 $ 214,001 $ 241,866 $ 268,360 $ 232,054
Cash dividends per share paid on
Circuit City Group common stock.............. $ 0.14 $ 0.12 $ 0.10 $ 0.08 $ 0.06
--------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
On January 24, 1997, Circuit City Stores, Inc. shareholders approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations and a retained interest
in the CarMax Group. The effects of this retained interest on the Circuit City
Group's Financial Statements are identified by the term "Inter-Group." All other
line items relate to Circuit City operations.
The CarMax Group Common Stock is intended to track separately the
performance of the CarMax operations. The CarMax interest held by the Circuit
City Group is not considered outstanding CarMax Group stock. Therefore, any net
earnings or loss attributable to the Circuit City Group's interest is not
included in the CarMax Group's per share calculations.
The following discussion and analysis refers to Circuit City Stores, Inc., which
includes the operations of both the Circuit City Group and the CarMax Group. All
financial statements reflect consummation of the CarMax Group stock offering on
February 7, 1997. For additional information, refer to the "Management's
Discussion and Analysis of Results of Operations and Financial Condition" for
the Circuit City Group and for the CarMax Group.
RESULTS OF OPERATIONS
SALES GROWTH
Total sales for Circuit City Stores, Inc. increased 9 percent in fiscal 1997, to
$7.66 billion. In fiscal 1996, total sales were $7.03 billion, a 26 percent
increase from $5.58 billion in fiscal 1995.
Percentage Sales Change From Prior Year
<TABLE>
<S> <C>
Circuit City Circuit City CarMax
Stores, Inc. Group Group
Total Total Comparable Total Comparable
Fiscal Sales Sales Sales Sales Sales
1997.......... 9% 6% (8)% 85% 23%
1996.......... 26% 23% 5% 258% 12%
1995.......... 35% 34% 15% 376% 43%
1994.......... 26% 26% 8% - -
1993.......... 17% 17% 7% - -
</TABLE>
The Circuit City Group. Geographic expansion and the addition of product
categories such as personal computers have been the primary contributors to the
Circuit City Group's total sales growth during the past five years. Late in
fiscal 1996, industry sales of consumer electronics and personal computers
weakened, resulting in comparable store sales declines for the Circuit City
Group. That softness continued into fiscal 1997, with personal computer sales
declining more dramatically during the second half of that year. The industry's
weakness produced an intense promotional climate and lower average retail
prices. Stronger industry sales of major appliances and fully featured video
products, categories in which Circuit City maintains relatively high market
shares, partly offset decreased sales in the other categories. Based on market
research and sales performance, management believes that Circuit City has gained
market share in the major appliance, digital satellite system and big-screen
television product classes during the past year. The industry weakness has
resulted in a significant number of competitive store closings and reductions in
competitor expansion plans. As a result, management believes that the Circuit
City locations continue to maintain substantial shares in existing markets and
to build significant shares in new markets.
The Circuit City Group sells two extended warranty programs on behalf of
unrelated third parties that issue these plans for merchandise sold by the Group
and other retailers. One of these programs is sold in most major markets and
fea-
19
tures in-home service for personal computer products. The second program covers
electronics and major appliances and at the end of fiscal year 1997 was offered
by approximately 85 percent of the Superstores. The remaining stores sell a
Circuit City extended warranty. For the Circuit City Group, gross dollar sales
from all extended warranty programs were 6.0 percent of the Group's total sales
in fiscal year 1997, compared with 5.9 percent in fiscal 1996 and 5.8 percent in
fiscal 1995. Total extended warranty revenue, which is reported in the Group's
total sales, was 5.1 percent of sales in fiscal years 1997 and 1996 and 5.4
percent in fiscal year 1995. The gross profit margins on products sold with
extended warranties are higher than the gross profit margins on products sold
without extended warranties. Third-party extended warranty revenue was 3.6
percent of the Group's total sales in fiscal 1997, 3.0 percent in fiscal 1996
and 2.3 percent in fiscal 1995. The increase reflects the higher percentage of
stores selling third-party contracts. The Group expects third-party extended
warranty revenue to continue increasing in fiscal 1998.
The CarMax Group. The fiscal 1997 sales growth for the CarMax Group primarily
reflects the addition of three locations and comparable store sales increases
for two locations classified as comparable stores throughout the year and two
locations classified as comparable stores for a portion of the year. Early in
fiscal 1997, CarMax began selling new vehicles at its largest store in Norcross,
Ga., under the terms of a franchise agreement with Chrysler Corporation. That
store is included in the comparable store base. The fiscal 1996 growth includes
two additional locations, one location classified as a comparable store
throughout the year and a second location classified as a comparable store for a
portion of the year. The fiscal 1995 sales increase includes the addition of a
second store and one store classified as comparable for a portion of the year.
In most states, the CarMax Group sells extended warranties on behalf of an
unrelated third party and has no contractual liability to the customer under the
warranty program. In states where third-party warranty sales are not feasible,
CarMax sells its own extended warranty. For the CarMax Group, gross dollar sales
from all extended warranty programs were 3.5 percent of the Group's total sales
in fiscal 1997, 3.8 percent in fiscal 1996 and 3.3 percent in fiscal 1995. Total
extended warranty revenue, which is reported in the Group's total sales, was 1.2
percent of total sales in fiscal 1997, 1.4 percent in fiscal 1996 and 0.5
percent in fiscal 1995. Third-party extended warranty revenue was 1.1 percent of
the Group's total sales in fiscal 1997, 1.3 percent in fiscal 1996 and 0.4
percent in fiscal 1995. The lower extended warranty percentages in fiscal 1997
reflect the additional sales of new cars, which are covered by manufacturers'
warranties.
Impact of Inflation. Inflation has not been a significant contributor to the
Company's results. During the past year, the average retail price has declined
in virtually all of the Circuit City Group's product categories. Management
expects no significant short-term change in this trend. Because the Group
purchases substantially all products, including consumer electronics, in U.S.
dollars, prices are not directly impacted by the value of the dollar in relation
to other foreign currencies, including the Japanese yen. Management expects that
increases in vehicle pricing would have a positive impact on the CarMax Group's
sales and earnings.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin was 23.0 percent of sales in fiscal 1997, a decrease
from 23.3 percent in fiscal 1996 and 24.8 percent in fiscal 1995. The lower
gross margins in fiscal years 1997 and 1996 versus fiscal year 1995 reflect weak
industry sales for the Circuit City Group and the resulting intensity in the
promotional climate; a higher mix of personal computer sales, which produce
gross profit margins lower than the Circuit City Group's average; and the
increased sales contribution from the CarMax Group. In fiscal 1997, the margin
pressure for the Circuit City Group was offset by a reduction in personal
computer sales when compared with the prior year and an increase in major
appliance, digital satellite system and big-screen television sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 19.7 percent of sales
in fiscal 1997 from 18.8 percent in fiscal 1996 but was slightly improved from
19.8 percent in fiscal 1995. The fiscal 1997 ratio primarily reflects the impact
of lower comparable store sales and the less favorable productivity of
larger-square-footage stores for the Circuit City Group. These factors were
partly offset by that Group's ongoing focus on maximizing store productivity and
corporate overhead efficiency, a net contribution from the Company's financing
operations and the lower expense structure for CarMax.
INTEREST EXPENSE
Interest expense was 0.4 percent of sales in fiscal 1997 and fiscal 1996 and 0.2
percent in fiscal 1995. Interest expense was incurred for both the Circuit City
and CarMax Groups on debt used to fund store expansion and working capital. The
increase from fiscal 1995 to fiscal 1996 reflects higher interest rates,
increased long-term debt and higher short-term borrowings resulting from the
Company's growth.
INCOME TAXES
The effective income tax rate was 38.0 percent in fiscal 1997 and 37.5 percent
in both fiscal 1996 and fiscal 1995. The increase in the tax rate for fiscal
1997 reflects increased sales in states with higher tax rates.
NET EARNINGS
Net earnings for Circuit City Stores, Inc. declined 24 percent to $136.4 million
in fiscal 1997. In fiscal 1996, net earnings
20
were $179.4 million, a 7 percent increase from $167.9 million in fiscal 1995.
The lower earnings in fiscal 1997 reflect the challenging industry environment
faced by the Circuit City Group and the anticipated losses for the CarMax Group
during the testing stage and the first phase of a national roll out.
RETURN ON SALES
Return on sales was 1.8 percent in fiscal 1997 compared with 2.6 percent in
fiscal 1996 and 3.0 percent in fiscal 1995. The reductions reflect the lower
earnings, including the higher losses for the CarMax Group.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Early application is not
permitted. This statement establishes new standards for computing and presenting
earnings per share. The Company has not determined the impact of SFAS No. 128 on
its earnings per share computations and presentation.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1997, net cash provided by operating activities was $14.2 million
compared with $55.3 million used in operating activities in fiscal 1996 and
$47.0 million provided by operating activities in fiscal 1995. The fiscal 1997
improvement primarily reflects less rapid growth in inventory for the Circuit
City Group and a higher increase in accounts payable partly offset by an
increase in accounts receivable and lower net earnings. The fiscal 1996 decrease
in cash principally reflects the limited earnings growth and lower increases in
the provision for deferred income taxes and in accounts payable, accrued
expenses, other current liabilities and accrued income taxes.
Capital expenditures have been funded through sale-leaseback transactions,
landlord reimbursements and short- and long-term debt. Capital expenditures of
$542.0 million in fiscal 1997 principally reflect Circuit City and CarMax
Superstores opened during the year and a portion of the Superstores opening in
fiscal 1998. The sale-leaseback and landlord reimbursement transactions
completed in fiscal 1997 totaled $332.7 million and were largely related to real
estate purchased in fiscal 1997 and fiscal 1996. Capital expenditures of $518.2
million in fiscal 1996 and $375.4 million in fiscal 1995 largely were incurred
in connection with the Group's expansion programs.
Receivables generated by the financing operations are funded through
securitization transactions, which allow the financing operations to sell the
receivables while retaining a small interest in the receivables. The credit card
bank subsidiary has a master trust securitization facility for its private-label
credit card that allows the transfer of up to $1.22 billion in receivables
through both private placement and the public market. A second securitization
program allows for the transfer of up to $1.45 billion in receivables related to
the subsidiary's bankcard programs. The securitization program for auto loan
receivables was started in fiscal 1996 with securitized receivable proceeds
totaling $87.0 million at February 29, 1996. At February 28, 1997, securitized
receivables totaled $145.0 million. Under the securitization program,
receivables are sold to an unaffiliated third party with the servicing retained.
Management expects that these securitization programs can be expanded to
accommodate future receivables growth.
<TABLE>
<S> <C>
Capitalization
Fiscal 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN MILLIONS) $ % $ % $ % $ % $ %
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current
installments.................. 430.3 19 399.2 23 178.6 14 29.6 3 82.4 9
Other long-term
liabilities................... 199.4 9 231.8 14 241.9 19 268.4 27 232.1 26
Total stockholders' equity....... 1,614.8 72 1,063.9 63 877.4 67 710.4 70 575.5 65
----------------------------------------------------------------------------------------
TOTAL CAPITALIZATION............. 2,244.5 100 1,694.9 100 1,297.9 100 1,008.4 100 890.0 100
----------------------------------------------------------------------------------------
</TABLE>
CAPITAL STRUCTURE
Total assets at February 28, 1997, were $3.08 billion, up $555.2 million, or 22
percent since February 29, 1996. The rise in assets primarily includes increases
of $207.6 million in net receivables, $158.9 million in cash and cash
equivalents, $111.8 million in net property and equipment and $69.2 million in
inventory.
Over the past three years, expansion for both Groups has been funded with
internally generated cash, sale-leaseback transactions, operating leases and
long-term debt. Consumer receivables have been funded through securitization
transactions. Late in fiscal 1997, Circuit City Stores, Inc. raised a net of
$412.3 million through the initial public offering of 21.86 million shares of
newly created CarMax Group Common Stock. The CarMax Group used approximately
$187 million of the net proceeds to repay its allocated portion of Circuit City
Stores, Inc. indebtedness. Management expects to use the remainder of the net
proceeds to finance part of the CarMax expansion plan. In fiscal 1997, the
Company entered into a five-year, $130 million unsecured bank term loan
21
agreement. At February 29, 1996, the Company classified $100 million of
short-term debt as long-term in anticipation of this agreement.
During the period from fiscal 1993 to 1997, stockholders' equity grew
substantially. From fiscal 1996 to 1997 stockholders' equity increased 52
percent to $1.61 billion. Capitalization for the past five years is illustrated
in the "Capitalization" table on page 21. Lower earnings for the Circuit City
Group and higher losses from the CarMax Group combined with the increase in
equity resulting from the CarMax offering produced a return on equity of 10.2
percent in fiscal 1997 compared with 18.5 percent in fiscal 1996. The returns
are below the Company's long-term objective of 20 percent but reflect the
challenging short-term environment for the Circuit City Group and the investment
in CarMax growth.
Management anticipates that in fiscal 1998 capital expenditures of
approximately $830 million will be funded through a combination of internally
generated cash, proceeds from the CarMax Group stock offering, sale-leaseback
transactions and operating leases and that securitization transactions will
finance the growth in receivables. At the end of fiscal 1997, Circuit City
maintained a multi-year, $150 million unsecured revolving credit agreement and
$415 million in seasonal lines that are renewed annually with various banks.
The Groups rely on the external debt of Circuit City Stores, Inc. to
provide working capital needed to fund net assets not otherwise disposed of
through sale-leasebacks or the securitization of receivables. All significant
financial activities of each Group are managed by the Company on a centralized
basis and are dependent on the financial condition of the Company. Such
financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995, which
became law in December 1995, provide companies with a "safe harbor" when making
forward-looking statements. This "safe harbor" encourages companies to provide
prospective information about their companies without fear of litigation. The
Company wishes to take advantage of the new "safe harbor" provisions of the Act
and is including this section in "Management's Discussion and Analysis" in order
to do so. Company statements that are not historical facts, including statements
about management's expectations for fiscal year 1998 and beyond, are
forward-looking statements and involve various risks and uncertainties. Factors
that could cause the Company's actual results to differ materially from
management's projections, forecasts, estimates and expectations include, but are
not limited to, the following:
(a) changes in the amount and degree of promotional intensity exerted by
current competitors and potential new competition from both retail stores and
alternative methods or channels of distribution such as electronic and telephone
shopping services and mail order;
(b) changes in general U.S. or regional U.S. economic conditions including,
but not limited to, consumer credit availability, consumer credit delinquency
and default rates, interest rates, inflation, personal discretionary spending
levels and consumer sentiment about the economy in general;
(c) the presence or absence of new products or product features in the
merchandise categories the Company sells and changes in the Company's actual
merchandise sales mix;
(d) lack of availability/access to sources of supply for appropriate
Circuit City or CarMax inventory;
(e) the ability to retain and grow an effective management team in a
dynamic environment or changes in the cost or availability of a suitable work
force to manage and support the Company's service-driven operating strategies;
(f) changes in availability or cost of capital expenditure and working
capital financing, including the availability of long-term financing to support
development of retail stores and distribution facilities and the availability of
securitization financing for credit card and auto installment loan receivables;
(g) changes in production or distribution costs or cost of materials for
the Company's advertising;
(h) availability of appropriate real estate locations for expansion;
(i) the imposition of new restrictions or regulations regarding the sale of
products and/or services the Company sells, changes in tax rules and regulations
applicable to the Company, the imposition of new environmental restrictions,
regulations or laws or the discovery of environmental conditions at current or
future locations or any failure to comply with such laws or any adverse change
in such laws;
(j) adverse results in significant litigation matters;
(k) changes in levels of competition in the car business from either
traditional competitors and/or new non-traditional competitors utilizing auto
superstore or other formats;
(l) the inability of the CarMax stores to reach planned mature sales and
earnings potential by the end of their fourth year, which is the maturation
point expected by management, but which has not been proven since no location
has been open for four years; and
(m) limited or lack of availability of new-car franchises within a suitable
radius of existing and proposed CarMax stores or limited manufacturer approval
of franchise acquisitions.
The United States retail industry and the specialty retail industry in
particular are dynamic by nature and have undergone significant changes over the
past several years. The Company's ability to anticipate and successfully respond
to continuing challenges is key to achieving its expectations.
22
COMMON STOCK
- --------------------------------------------------------------------------------
Circuit City Stores, Inc. Common Stock began trading as Circuit City Stores,
Inc.-Circuit City Group Common Stock on February 4, 1997. Newly created Circuit
City Stores, Inc.-CarMax Group Common Stock also began trading on February 4,
1997. Both Group stocks are traded on the New York Stock Exchange. The quarterly
market price and dividend data shown below apply to the Circuit City Stores,
Inc. Common Stock or the Circuit City Group Common Stock for the applicable
periods. No data is shown for the CarMax Group Stock since it traded for less
than a month in the two-year period and pays no dividends at this time.
<TABLE>
<S> <C>
Market Price of Common Stock Dividends
Fiscal 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------------------------------------------------
1st...................................................... $36.00 $29.25 $29.13 $21.50 $.030 $.025
2nd...................................................... $38.75 $29.25 $37.13 $26.25 $.035 $.030
3rd...................................................... $36.88 $30.25 $38.00 $28.13 $.035 $.030
4th...................................................... $35.75 $28.63 $31.25 $25.00 $.035 $.030
----------------------------------------------------------
TOTAL $.135 $.115
</TABLE>
23
<TABLE>
<S> <C>
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------------------------------------------------------------------------------------------------
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 % 1996 % 1995 %
- -----------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES.................. $ 7,663,811 100.0 $ 7,029,123 100.0 $5,582,947 100.0
Cost of sales, buying and warehousing............. 5,902,711 77.0 5,394,293 76.7 4,197,94 75.2
GROSS PROFIT...................................... 1,761,100 23.0 1,634,830 23.3 1,385,000 24.8
--------------------------------------------------------------------------
Selling, general and administrative
expenses [NOTE 9].............................. 1,511,294 19.7 1,322,430 18.8 1,106,370 19.8
Interest expense [NOTE 4]......................... 29,782 0.4 25,400 0.4 10,030 0.2
--------------------------------------------------------------------------
TOTAL EXPENSES.................................... 1,541,076 20.1 1,347,830 19.2 1,116,400 20.0
--------------------------------------------------------------------------
Earnings before income taxes................. 220,024 2.9 287,000 4.1 268,600 4.8
Provision for income taxes [NOTE 5]............... 83,610 1.1 107,625 1.5 100,725 1.8
--------------------------------------------------------------------------
NET EARNINGS...................................... $ 136,414 1.8 $ 179,375 2.6 $ 167,875 3.0
--------------------------------------------------------------------------
Net earnings (loss) attributable to [NOTES 1 AND 2]:
Circuit City Group common stock................ $ 136,680 $ 179,375 $ 167,875
CarMax Group common stock...................... (266) - -
------------ ----------- ----------
............................................... $ 136,414 $ 179,375 $ 167,875
----------- ----------- ----------
Weighted average common shares
and common share equivalents [NOTE 2]:
Circuit City Group common stock................ 99,342 $ 98,546 97,369
----------- ----------- ----------
CarMax Group common stock...................... 21,860
-----------
NET EARNINGS (LOSS) PER SHARE [NOTE 2]:
Circuit City Group common stock................ $ 1.38 $ 1.82 $ 1.72
----------- ----------- ----------
CarMax Group common stock...................... $ (0.01)
-----------
See accompanying notes to consolidated financial statements.
24
<PAGE>
CONSOLIDATED BALANCE SHEETS
At February 28 or 29
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 202,643 $ 43,704
Net accounts and notes receivable [NOTE 10]......................................... 531,974 324,395
Inventory........................................................................... 1,392,363 1,323,183
Deferred income taxes [NOTE 5]...................................................... 21,340 26,996
Prepaid expenses and other current assets........................................... 14,813 17,399
----------------------------------
TOTAL CURRENT ASSETS................................................................ 2,163,133 1,735,677
Property and equipment, net [NOTES 3 AND 4]......................................... 886,091 774,265
Other assets........................................................................ 31,949 16,080
----------------------------------
TOTAL ASSETS........................................................................ $ 3,081,173 $ 2,526,022
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 4 AND 8].............................. $ 1,490 $ 1,436
Accounts payable.................................................................... 720,754 604,488
Short-term debt [NOTE 4]............................................................ 347 92,087
Accrued expenses and other current liabilities...................................... 105,500 123,789
Accrued income taxes............................................. 8,560 9,375
--------------------------------
TOTAL CURRENT LIABILITIES........................................................... 836,651 831,175
Long-term debt, excluding current installments [NOTES 4 AND 8]...................... 430,290 399,161
Deferred revenue and other liabilities.............................................. 166,295 214,001
Deferred income taxes [NOTE 5]...................................................... 33,081 17,764
----------------------------------
TOTAL LIABILITIES................................................................... 1,466,317 1,462,101
----------------------------------
STOCKHOLDERS' EQUITY [NOTES 1 AND 6]:
Circuit City Group common stock, $0.50 par value; 175,000,000 shares
authorized; 98,178,000 shares issued and outstanding (97,380,000 in 1996)........ 49,089 48,690
CarMax Group common stock, $0.50 par value; 175,000,000 shares authorized;
21,860,000 shares issued and outstanding......................................... 10,930 -
Capital in excess of par value...................................................... 506,823 90,432
Retained earnings................................................................... 1,048,014 924,799
----------------------------------
TOTAL STOCKHOLDERS' EQUITY.......................................................... 1,614,856 1,063,921
----------------------------------
Commitments and contingent liabilities [NOTES 1, 7, 8, 10, 11 AND 12]
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 3,081,173 $ 2,526,022
----------------------------------
See accompanying notes to consolidated financial statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings.................................................... $ 136,414 $ 179,375 $ 167,875
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization................................ 98,977 79,812 66,866
(Gain) loss on sales of property and equipment............... (1,540) 5,600 2,199
Provision for deferred income taxes.......................... 20,973 22,411 73,745
Decrease in deferred revenue and other liabilities........... (47,706) (27,865) (26,494)
Increase in net accounts and notes receivable................ (207,579) (59,830) (75,575)
Increase in inventory, prepaid expenses and other current assets (66,594) (290,644)
(317,114)
(Increase) decrease in other assets.......................... (15,869) 1,911 (3,819)
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes........... 97,162 33,910 159,297
------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............. 14,238 (55,320) 46,980
------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment............................. (541,989) (518,175) (375,406)
Proceeds from sales of property and equipment................... 332,726 251,454 151,481
-----------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES........................... (209,263) (266,721) (223,925)
------------------------------------------------------
FINANCING ACTIVITIES:
(Payments on) proceeds from issuance of short-term debt, net.... (91,740) 92,087 -
Proceeds from issuance of long-term debt........................ 32,619 222,000 153,000
Principal payments on long-term debt............................ (1,436) (2,386) (3,484)
Proceeds from issuance of Circuit City Group common stock, net.. 15,385 18,245 8,352
Proceeds from issuance of CarMax Group common stock, net........ 412,335 - -
Dividends paid on Circuit City Group common stock............... (13,199) (11,163) (9,155)
NET CASH PROVIDED BY FINANCING ACTIVITIES....................... 353,964 318,783 148,713
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents................... 158,939 (3,258) (28,232)
Cash and cash equivalents at beginning of year..................... 43,704 46,962 75,194
-----------------------------------------------------
Cash and cash equivalents at end of year........................... $ 202,643 $ 43,704 $ 46,962
-----------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................ $ 29,925 $ 22,905 $ 8,150
Income taxes.................................................... $ 73,113 $ 88,477 $ 98,894
See accompanying notes to consolidated financial statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
Common Shares Outstanding Common Stock Capital In
Circuit City CarMax Circuit City CarMax Excess of Retained
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) Group Group Group Group Par Value Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1994.......................... 96,080 - $ 48,040 $ - $ 64,485 $ 597,867 $ 710,392
------------------------------------------------------------------------
Net earnings................................... - - - - - 167,875 167,875
Exercise of common stock options [NOTE 6]...... 260 - 130 - 2,519 - 2,649
Shares issued under Employee
Stock Purchase Plan [NOTE 6]................ 87 - 43 - 1,868 - 1,911
Shares issued under the 1994 Stock
Incentive Plan [NOTE 6]..................... 211 - 106 - 3,740 - 3,846
Tax benefit from stock issued.................. - - - - 3,272 - 3,272
Shares cancelled upon reacquisition by Company. (162) - (81) - (3,089) - (3,170)
Unearned compensation-restricted stock......... - - - - (156) - (156)
Cash dividends-Circuit City Group common
stock ($0.10 per share)..................... - - - - - (9,155) (9,155)
-------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1995...................... 96,476 - 48,238 - 72,639 756,587 877,464
------------------------------------------------------------------------
Net earnings................................... - - - - - 179,375 179,375
Exercise of common stock options [NOTE 6]...... 645 - 322 - 7,831 - 8,153
Shares issued under Employee
Stock Purchase Plan [NOTE 6]................ 75 - 38 - 2,174 - 2,212
Shares issued under the 1994 Stock
Incentive Plan [NOTE 6]..................... 259 - 129 - 5,745 - 5,874
Tax benefit from stock issued.................. - - - - 4,746 - 4,746
Shares cancelled upon reacquisition by Company. (75) - (37) - (1,631) - (1,668)
Unearned compensation-restricted stock......... - - - - (1,072) - (1,072)
Cash dividends-Circuit City Group common
stock ($0.12 per share)..................... - - - - - (11,163) (11,163)
-------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 1996...................... 97,380 - 48,690 - 90,432 924,799 1,063,921
------------------------------------------------------------------------
Net earnings............................ - - - - - 136,414 136,414
Exercise of common stock options [NOTE 6]...... 786 - 393 - 13,497 - 13,890
Shares issued under Employee
Stock Purchase Plan [NOTE 6]................ 78 - 39 - 2,491 - 2,530
Shares issued under the 1994 Stock
Incentive Plan [NOTE 6]..................... 255 - 127 - 7,455 - 7,582
Tax benefit from stock issued.................. - - - - 3,080 - 3,080
Shares issued in the CarMax Group stock
offering.................................... - 21,860 - 10,930 401,405 - 412,335
Shares cancelled upon reacquisition by Company. (321) - (160) - (9,654) - (9,814)
Unearned compensation-restricted stock......... - - - - (1,883) - (1,883)
Cash dividends-Circuit City Group common
stock ($0.14 per share)..................... - - - - - (13,199) (13,199)
------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1997...................... 98,178 21,860 $ 49,089 $ 10,930 $ 506,823 $ 1,048,014 $ 1,614,856
------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On January 24, 1997, the shareholders of Circuit City Stores, Inc. and its
subsidiaries (the "Company") authorized a restructuring of the existing common
stock of the Company into two new series of common stock intended to reflect
separately the performance of the Company's two main businesses - the consumer
electronics, major appliance, personal computer and music software retail
business, including its interest in the CarMax Group referred to below (the
"Circuit City Group"), and the used- and new-car retail business (the "CarMax
Group").
Subsequent to shareholder approval, the board of directors approved the
redesignation of each share of the Company's existing common stock as a share of
a new series of common stock called Circuit City Stores, Inc.-Circuit City Group
Common Stock, par value $0.50 per share ("Circuit City Stock"), which is
intended to reflect separately the performance of the Circuit City Group, which
is generally comprised of (i) the Company's consumer electronics, major
appliance, personal computer and music software retail business, (ii) an
interest in the CarMax Group, which excludes the interest represented by any
outstanding shares of CarMax Stock, as described below, and (iii) all other
businesses in which the Company may be engaged (other than those comprising the
CarMax Group). For presentation purposes, this redesignation of the Company's
common stock has been treated as if it occurred as of the beginning of the
earliest period presented in the accompanying consolidated financial statements.
In addition, the board of directors authorized the designation and issuance of
shares of a new series of common stock called Circuit City Stores, Inc.-CarMax
Group Common Stock, par value $0.50 per share ("CarMax Stock"), which is
intended to reflect separately the performance of the used- and new-car retail
business that comprises the CarMax Group. The Circuit City Group and the CarMax
Group are sometimes referred to collectively as the "Groups" and individually as
a "Group."
On February 7, 1997, the Company completed an offering of 21,860,000 shares
of CarMax Stock for cash in a public offering (the "Offering") for $20.00 per
share aggregating $437.2 million in proceeds before deducting related expenses
of $24.9 million. The Company allocated the net proceeds of the Offering to the
CarMax Group. Upon completion of the Offering and without giving effect to
options, the outstanding CarMax Stock represented 22.5 percent of the equity
value of the CarMax Group, and the Circuit City Group held a 77.5 percent
interest (the "Inter-Group Interest") in the equity value of the CarMax Group.
Holders of Circuit City Stock and holders of CarMax Stock are shareholders
of the Company and continue to be subject to all of the risks associated with an
investment in the Company and all of its businesses, assets and liabilities. The
financial results of the Circuit City Group and of the CarMax Group could affect
the market price of either series of stock or the assets legally available for
payment of dividends. Accordingly, the Company's financial information should be
read in conjunction with the Circuit City Group's and the CarMax Group's
financial information.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) Principles of Consolidation: The consolidated financial statements include
the accounts of the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
(B) Cash and Cash Equivalents: Cash equivalents of $165,975,000 at February 28,
1997, and $10,113,000 at February 29, 1996, consist of highly liquid debt
securities with original maturities of three months or less.
(C) Fair Value of Financial Instruments: The carrying value of the Company's
financial instruments, excluding interest rate swaps held for hedging purposes,
approximates fair value. Credit risk is the exposure to the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. The Company mitigates credit risk by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Company does not anticipate loss for
nonperformance. The Company broadly diversifies all financial instruments along
industry, product and geographic areas.
(D) Inventory: Inventory is stated at the lower of cost or market. Cost is
determined by the average cost method for the Circuit City Group's inventory and
by specific identification for the CarMax Group's vehicle inventory. Parts and
labor used to recondition vehicles, as well as transportation and other
incremental expenses associated with acquiring vehicles, are included in the
CarMax Group's inventory.
(E) Property and Equipment: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives, which range from three to 25 years.
Property held under capital leases is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(F) Pre-opening Expenses: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(G) Income Taxes: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized
28
for financial reporting purposes and the amounts recognized for income tax
purposes, measured by applying currently enacted tax laws. The Company
recognizes deferred tax assets if it is more likely than not that a benefit will
be realized.
(H) Deferred Revenue: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend beyond the normal manufacturer's warranty period, usually
with terms (including the manufacturer's warranty period) between 12 and 60
months. All revenue from the sale of the Circuit City Group's own extended
warranty contracts is deferred and amortized on a straight-line basis over the
life of the contracts. Incremental direct costs related to the sale of contracts
are deferred and charged to expense in proportion to the revenue recognized. All
other costs are charged to expense as incurred. Commission revenue for the
unrelated third-party extended warranty plans is recognized at the time of sale.
The CarMax Group sells its own service contracts and service contracts on
behalf of unrelated third parties. Contracts usually have terms of coverage
between 12 and 72 months. All revenue from the sale of the CarMax Group's own
service contracts is deferred and amortized over the life of the contracts
consistent with the pattern of repair experience of the industry. Incremental
direct costs related to the sale of contracts are deferred and charged to
expense in proportion to the revenue recognized. All other costs are charged to
expense as incurred. Commission revenue for the unrelated third-party service
contracts is recognized at the time of sale.
(I) Selling, General and Administrative Expenses: Operating profits generated by
the Company's financing operations are recorded as a reduction to selling,
general and administrative expenses.
(J) Advertising Expenses: All advertising costs are expensed as incurred.
(K) Net Earnings (Loss) Per Share: Net earnings per share for Circuit City Stock
is computed by dividing net earnings attributable to Circuit City Stock,
including the Circuit City Group's 100 percent interest in the losses of the
CarMax Group for periods prior to the Offering and the Circuit City Group's 77.5
percent interest in the CarMax Group subsequent to the Offering, by the weighted
average number of shares of Circuit City Stock and dilutive Circuit City Stock
equivalents outstanding.
Net loss per share for CarMax Stock is computed by dividing net loss
attributable to CarMax Stock by the weighted average number of shares of CarMax
Stock outstanding. Historical net loss per share is omitted from the statements
of operations for periods prior to the Offering since CarMax Stock was not part
of the capital structure of the Company for those periods.
(L) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting For Stock Issued to Employees," and to provide the
pro forma disclosure provisions of SFAS No. 123.
(M) Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities: In fiscal 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Adoption of SFAS No. 125 did not have a material impact
on the Company's financial position, results of operations or liquidity.
(N) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of: The
Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on March 1,
1996. Impairment of long-lived assets is recognized when the carrying amounts of
the impaired assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less the cost
to sell. Adoption of SFAS No. 121 did not have a material impact on the
Company's financial position, results of operations or liquidity.
(O) Risks and Uncertainties: The Circuit City Group is the nation's largest
retailer of brand-name consumer electronics and major appliances and a leading
retailer of personal computers and music software. The diversity of the Circuit
City Group's products, customers, suppliers and geographic operations
significantly reduces the risk that a severe impact will occur in the near term
as a result of changes in its customer base, competition, sources of supply or
markets. It is unlikely that any one event would have a severe impact on the
Company's operating results.
The CarMax Group is a used- and new-car retail business. The diversity of
the CarMax Group's customers and suppliers reduces the risk that a severe impact
will occur in the near term as a result of changes in its customer base,
competition or sources of supply. The CarMax Group's operations currently are
concentrated in the southeastern United States. A severe economic downturn in
the southeastern United States could negatively impact the CarMax Group's
operating results. Due to the CarMax Group's geographic concentration and
limited overall size, management cannot assure that unanticipated events will
not have a negative impact on the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses
29
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
(P) Corporate Allocations: The Company manages corporate general and
administrative costs and other shared services on a centralized basis.
Allocations of these corporate activities and their related expenses to the
Groups is based on methods that the Company believes to be reasonable.
The provision for federal income taxes is determined on a consolidated
basis. The financial statement provision is reflected in each Group's financial
statements in accordance with the Company's tax allocation policy. In general,
this policy provides that the consolidated tax provision be allocated between
the Groups based principally upon the financial income, taxable income, credits
and other amounts directly related to the respective Group. Tax benefits that
cannot be used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits.
(Q) Reclassifications: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 or 29 is summarized as follows:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------
Land and buildings (20 to 25 years)..... $ 132,127 $ 89,089
Construction in progress................ 152,831 197,980
Furniture, fixtures and equipment
(3 to 8 years).................... 506,324 389,845
Leasehold improvements (10 to 15 years). 433,085 353,157
Capital leases, primarily buildings
(20 years)........................... 12,471 13,140
------------------------
1,236,838 1,043,211
Less accumulated depreciation and
amortization......................... 350,747 268,946
------------------------
Property and equipment, net............. $ 886,091 $ 774,265
------------------------
4. DEBT
Long-term debt at February 28 or 29 is summarized as follows:
(AMOUNTS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------
Term loans............................... $ 405,000 $275,000
Short-term debt expected to be
refinanced............................ - 100,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest
ranging from 5.4% to 7.0%............. 13,706 12,393
Obligations under capital leases [NOTE 8] 13,074 13,204
-----------------------
Total long-term debt..................... 431,780 400,597
Less current installments................ 1,490 1,436
-----------------------
Long-term debt, excluding
current installments.................. $ 430,290 $399,161
-----------------------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1997, the interest rate on the term loan was 5.86 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1997, the interest rate
on the term loan was 5.80 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1997, the interest rate
on the term loan was 5.73 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with five banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2001. The agreement provides for annual one-year extensions of the
final maturity beginning on or before August 31, 1997, and each August 31
thereafter. No amounts were outstanding under the revolving credit agreement at
February 28, 1997, or February 29, 1996.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$14,575,000 at February 28, 1997, and $13,073,000 at February 29, 1996.
The scheduled aggregate annual principal payments on long-term obligations
for the next five fiscal years are as follows: 1998 - $1,490,000; 1999 -
$1,586,000; 2000 - $1,743,000; 2001 - $176,380,000; 2002 - $134,139,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1997, and February 29, 1996.
Short-term debt includes committed lines of credit and informal credit
arrangements. Amounts outstanding and committed lines of credit available are as
follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------
Average short-term debt
outstanding....................... $186,569 $185,789
-------------------
Maximum short-term debt
outstanding....................... $580,000 $479,000
-------------------
Aggregate committed lines
of credit......................... $415,000 $255,000
-------------------
</TABLE>
30
The weighted average interest rate on the outstanding short-term debt was
5.4 percent during fiscal 1997, 5.9 percent during fiscal 1996 and 5.3 percent
during fiscal 1995.
The Company capitalizes interest in connection with the construction of
certain facilities. In fiscal 1997, interest capitalized amounted to $6,970,000
($6,780,000 in fiscal 1996 and $3,846,000 in fiscal 1995).
5. INCOME TAXES
The Company files a consolidated federal income tax return. The components of
the provision for income taxes follow:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------
Current:
Federal................... $ 55,673 $ 80,678 $21,250
State..................... 6,964 4,536 5,730
---------------------------
62,637 85,214 26,980
---------------------------
Deferred:
Federal................... 19,839 18,891 69,035
State..................... 1,134 3,520 4,710
---------------------------
20,973 22,411 73,745
---------------------------
Provision for income taxes... $83,610 $107,625 $100,725
---------------------------
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
1997 1996 1995
- -------------------------------------------------------------
Federal statutory income
tax rate..................... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit....... 3.0 2.5 2.5
-------------------------
Effective income tax rate....... 38.0% 37.5% 37.5%
-------------------------
</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 28, 1997, and February 29, 1996, are as follows:
<TABLE>
<C> <S>
(AMOUNTS IN THOUSANDS) 1997 1996
- ---------------------------------------------------------
Deferred tax assets:
Deferred revenue.................... $10,004 $24,475
Inventory capitalization............ 7,643 3,784
Accrued expenses.................... 30,176 34,190
Other............................... 3,354 3,182
-----------------
Total gross deferred tax assets.. 51,177 65,631
Deferred tax liabilities:
Depreciation and amortization....... 43,085 39,800
Prepaid benefit programs............ - 886
Other prepaid expenses.............. 7,982 6,337
Other............................... 11,851 9,376
-----------------
Total gross deferred tax
liabilities.................... 62,918 56,399
-----------------
Net deferred tax (liability) asset..... $(11,741) $ 9,232
-----------------
</TABLE>
Of the gross deferred tax assets at February 28, 1997, and at February 29,
1996, approximately $47 million and $61 million, respectively, can be realized
by carrybacks or offsetting of deferred tax liabilities. Based on the Company's
historical and current pre-tax earnings, management believes the remaining
amount will be realized through future taxable income; therefore, no valuation
allowance is necessary.
6. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) Preferred Stock: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Stock and
CarMax Stock. The rights are exercisable only upon the attainment of, or the
commencement of a tender offer to attain, a specified ownership interest in the
Company by a person or group. When exercisable, each Circuit City right would
entitle shareholders to buy one four-hundredth of a share of Cumulative
Participating Preferred Stock, Series E, $20 par value, at an exercise price of
$35 per share subject to adjustment. Each CarMax right, when exercisable, would
entitle shareholders to buy one four-hundredth of a share of Cumulative
Participating Preferred Stock, Series F, $20 par value, at an exercise price of
$22 per share subject to adjustment. A total of 1,000,000 shares of such
preferred stock, which have preferential dividend and liquidation rights, has
been designated; 800,000 shares have been reserved. No such shares are
outstanding. In the event that an acquiring person or group acquires the
specified ownership percentage of the Company's common stock (except pursuant to
a cash tender offer for all outstanding shares determined to be fair by
continuing directors) or engages in certain transactions with the Company after
the rights become exercisable, each right will be converted into a right to
purchase, for half the current market price at that time, shares of the related
Group stock valued at two times the exercise price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding.
(B) Voting Rights: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share
31
of that series shall be entitled to one vote. If either series of common stock
is entitled to vote as a separate voting group with respect to any matter, each
share of that series shall, for purposes of such vote, be entitled to one vote
on such matter.
(C) Restricted Stock: The Company has issued restricted stock under the
provisions of the 1994 and 1988 Stock Incentive Plans whereby key employees are
granted restricted shares of Circuit City Stock. Shares are awarded in the name
of the employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire three
years from the date of grant. In fiscal 1997, restricted stock awards for
254,745 shares were granted to eligible employees. The market value of these
shares has been recorded as unearned compensation and is a component of
stockholders' equity. Unearned compensation is expensed over the restriction
periods. In fiscal 1997, a total of $3,790,200 was charged to operations
($3,362,500 in 1996 and $2,552,500 in 1995). As of February 28, 1997, 570,609
restricted shares were outstanding.
(D) Employee Stock Purchase Plan: The Company has an Employee Stock Purchase
Plan for all employees meeting certain eligibility criteria. Under the Plan,
eligible employees may purchase shares of Circuit City Stock, subject to certain
limitations, at 85 percent of its market value. Purchases are limited to 10
percent of an employee's eligible compensation, up to a maximum of $7,500 per
year. All shares have been redesignated as Circuit City Stock. At February 28,
1997, a total of 563,068 shares remained available under the Plan. During fiscal
1997, 499,338 shares were issued to or purchased on the open market for
employees (474,889 in fiscal 1996 and 537,467 in fiscal 1995). The average price
per share was $32.68 in fiscal 1997, $29.97 in fiscal 1996 and $22.23 in fiscal
1995. The purchase price discount is charged to operations and totaled
$2,433,600 in fiscal 1997, $2,030,000 in fiscal 1996 and $1,760,200 in fiscal
1995.
(E) Stock Incentive Plans: Under the Company's stock incentive plans, incentive
and non-qualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Stock or CarMax Stock. The
exercise price for incentive stock options for employees and non-qualified
options for outside directors is equal to, or greater than, the market value at
the date of grant; for non-qualified options granted under the 1988 Plan for
employees, it is at least 85 percent of the market value at the date of grant
(100 percent under the 1994 Plan). Options generally are exercisable over a
period of from one to 10 years from the date of grant.
As of February 28, 1997, there were outstanding options to purchase shares
of stock of the corporate entity comprising the CarMax Group. These options are
held by management and key employees of the CarMax Group and vest evenly on the
third, fourth and fifth anniversary of the grant date with a maximum option term
of seven years. The exercise price is equal to, or greater than, the fair market
value of the stock at the date of grant. The Company intends to convert these
options into options to purchase CarMax Stock, preserving the aggregate
intrinsic value of the options. In addition, the vesting provisions and option
periods of the original grants will remain the same when converted.
A summary of the status of the Company's stock options, assuming conversion
of the CarMax Stock options, and changes during the years ended February 28 or
29 are shown in Table 1. Table 2 summarizes information about stock options
outstanding as of February 28, 1997.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Table 1 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
(Shares in Thousands) SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
Outstanding at beginning of year............ 3,563 $18.63 3,709 $ 17.14 3,594 $16.69
Granted..................................... 2,159 43.38 763 22.98 750 18.34
Exercised................................... (786) 17.67 (645) 12.64 (260) 10.18
Cancelled................................... (108) 21.90 (264) 24.06 (375) 19.41
-------- ----- -----
Outstanding at end of year................. 4,828 $29.76 3,563 $ 18.63 3,709 $17.14
------- ----- -----
Options exercisable at end of year.......... 1,629 $17.24 1,847 $ 16.19 2,070 $15.70
------- ----- -----
CarMax Group:
Outstanding at beginning of year............ 4,278 $ 0.22 3,518 $ 0.22 - $ -
Granted..................................... 961 1.68 796 0.22 3,518 0.22
Exercised................................... - - - - -
Cancelled................................... (470) 0.27 (36) 0.22 - -
----- ----- -----
Outstanding at end of year................. 4,769 $ 0.51 4,278 $ 0.22 3,518 $ 0.22
----- ----- -----
Options exercisable at end of year.......... - $ - - $ - - $ -
----- ----- -----
32
Table 2 Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(SHARES IN THOUSANDS) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Circuit City Group:
$ 5.94 to 10.56................................. 285 1.0 $ 8.59 285 $ 8.59
13.19 to 20.13................................. 1,306 2.7 16.81 886 16.09
22.50 to 29.13................................. 1,057 3.9 23.62 445 24.63
29.50 to 36.88................................. 1,180 7.2 29.97 13 34.47
59.00.......................................... 1,000 6.0 59.00 - -
----- -----
Total........................................... 4,828 4.6 $29.76 1,629 $17.24
----- -----
CarMax Group:
$ 0.22.......................................... 4,540 5.0 $ 0.22 - $ -
6.25......................................... 229 5.0 6.25 - -
----- ----
Total........................................... 4,769 5.0 $ 0.51 - $ -
----- ----
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the Circuit City
Group's net earnings and net earnings per share would have been reduced to the
pro forma amounts indicated below. In accordance with the transition provisions
of SFAS No. 123, the pro forma amounts reflect options with grant dates
subsequent to March 1, 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net earnings amounts presented below because compensation cost is
reflected over the options' vesting periods and compensation cost of options
granted prior to March 1, 1995, is not considered. The pro forma effect on
fiscal year 1997 may not be representative of the pro forma effects on net
earnings for future years. The impact of applying SFAS No. 123 methods to the
CarMax Group's net loss and net loss per share is immaterial.
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS Years Ended February 28 or 29
EXCEPT PER SHARE DATA) 1997 1996
- -----------------------------------------------------------------
Circuit City Group:
Net earnings-as reported............. $136,680 $ 179,375
Net earnings-pro forma............... 133,326 178,325
Net earnings per share-as reported... $ 1.38 $ 1.82
Net earnings per share-pro forma..... 1.34 1.81
For the purpose of computing the Circuit City Group's pro forma amounts
indicated above, the fair value of each option on the date of grant is estimated
using the Black-Scholes option-pricing model. The weighted average assumptions
used in the model are as follows:
1997 1996
Expected dividend yield..................... 0.4% 0.4%
Expected stock volatility................... 33% 35%
Risk-free interest rates.................... 6% 7%
Expected lives (in years)................... 4 4
</TABLE>
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the Circuit City Group is $8 in fiscal 1997
and $9 in fiscal 1996.
7. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service The cost of the program is being funded currently. Plan benefits
are generally based on years of service and average compensation. Plan assets
consist primarily of equity securities and included 80,000 shares of Circuit
City Stock at February 28, 1997, and February 29, 1996.
The components of net pension expense are as follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------
Service cost of benefits earned
during the year............. $9,388 $5,896 $4,485
Interest cost on projected
benefit obligation.......... 4,701 3,632 2,715
Actual return on plan assets... (9,903) (9,277) (102)
Net amortization............... 6,908 6,314 (3,452)
------------------------
Net pension expense............ $11,094 $6,565 $3,646
------------------------
33
Contributions required were $6,603,000 in fiscal 1997, $1,160,000 in fiscal
1996 and $3,710,000 in fiscal 1995.
The following table sets forth the Plan's financial status and amounts
recognized in the consolidated balance sheets as of February 28 or 29:
(AMOUNTS IN THOUSANDS) 1997 1996
- ---------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested.............................. $ 43,568 $39,505
Non-vested.......................... 5,401 5,136
-----------------
Total benefits......................... 48,969 44,641
Additional amounts related to projected
salary increases.................... 21,607 22,747
-----------------
Projected benefit obligation for services
rendered to date.................... 70,576 67,388
Plan assets at fair value.............. (62,928) (47,093)
Projected benefit obligation in excess of
plan assets......................... 7,648 20,295
Unrecognized gain (loss) from past
experience.......................... 3,328 (14,117)
Unrecognized prior service cost........ 770 875
Unrecognized net obligation being
recognized over 15 years............ 1,010 1,212
-----------------
Accrued pension cost................... $ 12,756 $ 8,265
-----------------
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
1997 1996 1995
- ------------------------------------------------------------
Weighted average discount rate...... 7.5% 7.0% 8.0%
Rate of increase in compensation
levels............................ 5.5% 6.0% 6.5%
Rate of return on plan assets....... 9.0% 9.0% 8.0%
---------------------
8. LEASE COMMITMENTS
The Company conducts a substantial portion of its business in leased premises.
The Company's lease obligations are based upon contractual minimum rates. For
certain locations, amounts in excess of these minimum rates are payable based
upon specified percentages of sales. Rental expense and sublease income for all
operating leases are summarized as follows:
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------
Minimum rentals.............. $ 184,618 $ 148,082 $ 118,042
Rentals based on sales
volume...................... 2,322 2,871 2,513
Sublease income.............. (11,121) (9,996) (8,875)
-------------------------------
Net.......................... $ 175,819 $ 140,957 $ 111,680
-------------------------------
The Company computes rent based on a percentage of sales volumes in excess
of defined amounts in certain store locations. Most of the Company's other
leases are fixed-dollar rental commitments, some with rent escalations based on
the Consumer Price Index. Most provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 28 years at terms substantially the same as the initial
terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Company, as of February 28, 1997, were:
Operating Operating
Fiscal Capital Lease Sublease
(AMOUNTS IN THOUSANDS) Leases Commitments Income
1998....................... $ 1,541 $ 206,825 $(11,526)
1999....................... 1,579 204,587 (10,281)
2000....................... 1,662 202,486 (9,379)
2001....................... 1,681 201,317 (8,311)
2002....................... 1,725 198,164 (7,353)
After 2002................. 19,958 2,293,922 (42,526)
------------------------------
Total minimum lease
payments................ 28,146 $3,307,301 $(89,376)
--------------------
Less amounts representing
interest................ 15,072
-------
Present value of net
minimum capital lease
payments [NOTE 4]....... $13,074
</TABLE>
In fiscal 1997, the Company entered into sale-leaseback transactions with
unrelated parties at an aggregate selling price of $201,694,000 ($183,900,000 in
fiscal 1996 and $85,970,000 in fiscal 1995). The Company does not have
continuing involvement under the sale-leaseback transactions.
9. SUPPLEMENTARY INCOME STATEMENT
INFORMATION
Advertising expense, which is included in selling, general and administrative
expenses in the accompanying consolidated statements of earnings, amounted to
$354,270,000 (4.6 percent of net sales and operating revenues) in fiscal 1997,
$324,335,000 (4.6 percent of net sales and operating revenues) in fiscal 1996
and $262,969,000 (4.7 percent of net sales and operating revenues) in fiscal
1995.
10. SECURITIZATIONS
(A) Credit Card Securitizations: The Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by
First North American National Bank, its wholly owned credit card bank subsidiary
(the "Bank Subsidiary"). The Company implemented SFAS No. 125 with respect to
sales of credit card receivables occurring after December 31, 1996. Proceeds
from securitization transactions were $551.1 million for fiscal 1997, $692.3
million for fiscal 1996 and $428.4 million for fiscal 1995.
34
<TABLE>
<S> <C>
At February 28 or 29 the following amounts were outstanding:
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------
Securitized receivables......... $2,594,651 $1,860,459
Interest retained by Company.... (293,586) (110,459)
Net receivables transferred..... $2,301,065 $1,750,000
-------------------------
Net receivables transferred
with recourse................ $1,317,565 $ 760,000
-------------------------
Program capacity................ $2,665,000 $1,910,000
-------------------------
</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 1997, the Bank Subsidiary placed an additional $225 million in the
public market for a total program capacity of $1,215 million. The master trust
vehicle permits further expansion of the securitization programs to meet future
receivables growth. The agreements have no recourse provisions.
In addition, the Bank Subsidiary has an asset securitization program in
place for its bank card receivables that allows, as of February 28, 1997, the
transfer of up to $1,450 million in receivables. The bank card securitization
agreements provide recourse to the Company for any cash flow deficiencies. The
Company believes that as of February 28, 1997, no liability existed under these
recourse provisions. The finance charges from the transferred receivables are
used to fund interest costs, charge-offs, servicing fees and other related
costs.
The Bank Subsidiary's servicing revenue, including gains on sales of
receivables of $3.7 million for fiscal 1997, totaled $197.0 million for fiscal
1997, $142.9 million for fiscal 1996 and $77.8 million for fiscal 1995. The
servicing fees specified in the credit card securitization agreements adequately
compensate the Bank Subsidiary for servicing the accounts. Accordingly, no
servicing asset or liability has been recorded. Rights recorded for future
interest income from serviced assets that exceed the contractually specified
servicing fees are carried at fair value and amounted to $3.2 million at
February 28, 1997, and are included in net accounts receivable.
(B) Auto Loan Securitization: In fiscal 1996, the Company entered into a
securitization agreement to finance the consumer installment credit receivables
generated by First North American Credit Corporation ("FNAC"), an installment
lending division of the Company. Proceeds from the auto loan securitization
transaction were $58 million during fiscal 1997 and $87 million during fiscal
1996. The seasoned portfolio and more estimable losses allowed the Company to
recognize gains on the sales of these receivables beginning in fiscal 1997.
At February 28 or 29 the following amounts were outstanding:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------
Securitized receivables........... $155,234 $ 93,065
Interest retained by Company...... (10,234) (6,065)
----------------------
Net receivables transferred....... $145,000 $ 87,000
----------------------
Program capacity.................. $175,000 $100,000
----------------------
</TABLE>
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. A restructuring of the facility
during fiscal 1997 resulted in the recourse provisions being eliminated.
Servicing revenue for FNAC, including gains on sales of receivables of $4.3
million in fiscal 1997, totaled $8.7 million for fiscal 1997 and $2.0 million
for fiscal 1996 and for fiscal 1995.
The servicing fee specified in the auto loan securitization agreement
adequately compensates FNAC for servicing the loans. Accordingly, no servicing
asset or liability has been recorded. Rights recorded for future interest income
from serviced assets that exceed the contractually specified servicing fee are
carried at fair value and amounted to $3.1 million at February 28, 1997, and are
included in net accounts receivable.
11. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swap
agreements with notional amounts totaling $300 million relating to a public
issuance of securities by the master trust. As part of this issuance, $344
million of five-year, fixed-rate certificates were issued to fund consumer
credit receivables. The Bank Subsidiary is servicer for the accounts, and as
such, receives its monthly cash portfolio yield after deducting interest,
charge-offs and other related costs. The underlying receivables are based on a
floating rate. The swaps were put in place to better match funding costs to the
receivables being securitized. As a result, the master trust pays fixed-rate
interest while the Company utilizes the swaps to convert the fixed-rate
obligation to a floating-rate, LIBOR-based obligation. The fair value of the
swaps is the amount at which they could be settled based on estimates obtained
from the counterparties, which are two banks highly rated by several financial
rating agencies. The swaps are held for hedging purposes and are not recorded at
fair value. Recording the swaps at fair value at February 28, 1997, would result
in a gain of $10.9 million and at February 29, 1996, would result in a gain of
$19.4 million.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This
35
value is based on estimates obtained from the counterparties, which are two
banks highly rated by several financial rating agencies. The swaps are held for
hedging purposes and are not recorded at fair value. Recording the swaps at fair
value at February 28, 1997, would result in a gain of $0.1 million and at
February 29, 1996, would result in a loss of $2.5 million.
In November 1995, the Company entered into a 50-month amortizing swap with
a notional amount of $75 million and in October 1996, entered into a 40-month
amortizing swap with a notional amount of $64 million relating to the auto loan
receivable securitization to convert variable-rate financing costs to a
fixed-rate obligation to better match the funding costs to the receivables being
securitized. These swaps were entered into as part of the sale of receivables
and are therefore included in the gain on the sale of receivables. The remaining
notional amount outstanding under these swaps was $114 million at February 28,
1997, and $71 million at February 29, 1996.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Company does not anticipate significant market risk from swaps, since their
use is to more closely match funding costs to the use of the funding. Credit
risk is the exposure to nonperformance of another party to an agreement. The
Company mitigates credit risk by dealing with highly rated counterparties.
12. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the Company's evaluation of the information presently
available, management believes that the ultimate resolution of any such
proceedings will not have a material adverse effect on the Company's financial
position, liquidity or results of operations.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS First Quarter Second Quarter Third Quarter Fourth Quarter Year
EXCEPT PER SHARE DATA) ----------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales and operating
revenues.......... $1,615,266 $1,391,658 $1,767,043 $1,600,805 $1,863,947 $1,783,446 $2,417,555 $2,253,214 $7,663,811 $7,029,123
-------------------------------------------------------------------------------------------------------------
Gross profit......... $ 362,270 $ 319,886 $ 396,328 $ 368,292 $ 422,859 $ 405,134 $ 579,643 $ 541,518 $1,761,100 $1,634,830
-------------------------------------------------------------------------------------------------------------
Net earnings (loss)
attributable to:
Circuit City Stock $ 16,783 $ 24,618 $ 31,583 $ 41,246 $ 19,787 $ 31,451 $ 68,527 $ 82,060 $ 136,680 $ 179,375
-------------------------------------------------------------------------------------------------------------
CarMax Stock...... $ - $ - $ - $ - $ - $ - $ (266)$ - $ (266)$ -
-------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share:
Circuit City Stock $ 0.17 $ 0.25 $ 0.32 $ 0.42 $ 0.20 $ 0.32 $ 0.69 $ 0.83 $ 1.38 $ 1.82
-------------------------------------------------------------------------------------------------------------
CarMax Stock ..... $ - $ - $ - $ - $ - $ - $ (0.01)$ - $ (0.01)$ -
-------------------------------------------------------------------------------------------------------------
</TABLE>
36
<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 28, 1997 and February 29, 1996 and
the related consolidated statements of earnings, stockholders' equity and cash
flows for each of the fiscal years in the three-year period ended February 28,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circuit City
Stores, Inc. and subsidiaries as of February 28, 1997 and February 29, 1996 and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended February 28, 1997 in conformity with
generally accepted accounting principles.
/s/KPMG Peat Markwick LLP
Richmond, Virginia
April 3, 1997
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders of Circuit City Stores, Inc.:
The consolidated financial statements of Circuit City Stores, Inc. and
subsidiaries, as well as the financial statements of the Circuit City Group and
the CarMax Group, have been prepared under the direction of management, which is
responsible for their integrity and objectivity. These financial statements have
been prepared in conformity with generally accepted accounting principles,
except for the Circuit City Group which has accounted for its interest in the
CarMax Group in a manner similar to the equity method of accounting. Generally
accepted accounting principles require that the CarMax Group be consolidated
with the Circuit City Group. However, management feels the manner in which the
Circuit City Group is presented more clearly indicates the separate operating
results of the core electronics business. The financial statements include
amounts that are the best estimates and judgments of management with
consideration given to materiality.
Management is responsible for maintaining an internal control structure
designed to provide reasonable assurance that the books and records reflect the
transactions of the Company and that the Company's established policies and
procedures are carefully followed. Because of inherent limitations in any
system, there can be no absolute assurance that errors or irregularities will
not occur. Nevertheless, management believes that the internal control structure
provides reasonable assurance that assets are safeguarded and that financial
information is objective and reliable.
The Company's and the Groups' financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors. Their Independent Auditors'
Reports, which are based on audits made in accordance with generally accepted
auditing standards, express opinions as to the fair presentation in conformity
with generally accepted accounting principles of the financial statements. In
performing their audits, KPMG Peat Marwick LLP considers the Company's internal
control structure to the extent it deems necessary in order to issue its
opinions on the Company's and the Groups' financial statements.
The audit committee of the board of directors is composed solely of outside
directors. The committee meets periodically with management, the internal
auditors and the independent auditors to assure each is properly discharging its
responsibilities. KPMG Peat Marwick LLP and the internal auditors have full and
free access to meet privately with the audit committee to discuss accounting
controls, audit findings and financial reporting matters.
/s/Richard L. Sharp
Richard L. Sharp
Chairman and Chief Executive Officer
/s/Michael T. Chalifoux
Michael T. Chalifoux
Senior Vice President, Chief Financial Officer and
Corporate Secretary
April 3, 1997
37
CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
On January 24, 1997, Circuit City Stores, Inc. shareholders approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations and a retained interest
in the CarMax Group. The effects of this retained interest on the Circuit City
Group's Financial Statements are identified by the term "Inter-Group." All other
line items relate to Circuit City operations.
The CarMax Group Common Stock is intended to track separately the
performance of the CarMax operations. The CarMax interest held by the Circuit
City Group is not considered outstanding CarMax Group stock. Therefore, any net
earnings or loss attributable to the Circuit City Group's interest is not
included in the CarMax Group's per share calculations.
The following discussion and analysis refers to the Circuit City Group. Reported
earnings reflect the Circuit City Group's 100 percent interest in the losses of
the CarMax Group prior to the consummation of the offering on February 7, 1997,
and the Circuit City Group's 77.5 percent interest in the CarMax Group from the
offering to the end of fiscal year 1997. For additional information, refer to
the "Management's Discussion and Analysis of Results of Operations and Financial
Condition" for Circuit City Stores, Inc. and for the CarMax Group.
RESULTS OF OPERATIONS
SALES GROWTH
Total sales for the Circuit City Group increased 6 percent in fiscal 1997, to
$7.15 billion. In fiscal 1996, total sales were $6.75 billion, a 23 percent
increase from $5.51 billion in fiscal 1995.
Percentage Sales Change From Prior Year
<TABLE>
<S> <C>
Circuit City Group
Total Comparable Industry
Fiscal Sales Sales Sales*
1997.............................. 6% (8)% (8)%
1996.............................. 23% 5% 6%
1995.............................. 34% 15% 11%
1994.............................. 26% 8% 7%
1993.............................. 17% 7% 7%
</TABLE>
* The industry sales rates are derived from Electronics Industries Association,
Association of Home Appliance Manufacturers, Recording Industry Association of
America and Company estimates of audio, video, home office, telecommunications,
appliance and music software sales. Music software is not included in industry
sales prior to fiscal 1995. In those years, Circuit City was not a significant
participant in this category.
Continued geographic expansion of the Group's Circuit City Superstores
produced the fiscal 1997 total sales increase. The contribution from new stores
was partly offset by a comparable store sales decline of 8 percent, which
reflects an estimated 8 percent reduction in industry sales. In fiscal 1997, the
Group opened a net of 65 Superstores, including 14 in the last month of the
year. The Group entered two major metropolitan markets, Detroit, Mich., and
Pittsburgh, Penn. The Group also opened stores in smaller markets, added stores
to existing markets and replaced or expanded 20 stores.
The Group operates four Circuit City Superstore formats with square footage
and merchandise assortments tailored to population and volume expectations for
specific trade areas. The "D" format was developed in fiscal 1995 to serve the
most populous trade areas. At the end of fiscal 1997, selling space in the "D"
format stores averaged about 24,000 square feet with total square footage
averaging 43,360. The "D" stores offer the largest merchandise assortment of all
the formats. The "C" format constitutes the largest percent of the store base.
Selling square footage in this format has been increased during the last several
years, and new "C" stores in fiscal 1997 generally had between 17,000 square
feet and 20,000 square feet of selling space. At the end of fiscal 1997, total
square footage for all "C" stores averaged 34,220. The "B" format often is
located in smaller markets or in trade areas that are on the fringes of larger
metropolitan markets. At the end of fiscal 1997, selling space in these stores
averaged approximately 12,000 square feet with an average total square footage
of 25,318. The "B" stores offer a broad merchandise assortment that maximizes
return on investment in their lower volume areas. The "A" format serves the
least populated trade areas. Selling space averaged approximately 10,000 square
feet at the end of fiscal 1997, and total square footage averaged 18,507. The
"A" stores feature a layout, staffing levels and merchandise assortment that
creates high productivity in the smallest markets.
The Group also operates 45 mall-based Circuit City Express stores. These
stores are located in regional malls, are approximately 2,000 to 3,000 square
feet in size and sell small, gift-oriented items. During fiscal 1997, the Group
opened a net of nine Circuit City Express stores.
Store Mix
<TABLE>
<S> <C>
Retail Units at Year End
Fiscal 1997 1996 1995 1994 1993
Superstore
"D" Superstore 95 61 12 - -
"C" Superstore 278 259 257 219 188
"B" Superstore 54 46 37 30 24
"A" Superstore 16 12 6 4 2
Electronics-Only 5 5 5 7 7
Circuit City Express 45 36 35 34 39
-----------------------------
TOTAL 493 419 352 294 260
-----------------------------
</TABLE>
38
Geographic expansion and the addition of product categories such as
personal computers were the primary contributors to the Group's total sales
growth from fiscal 1993 through fiscal 1996. Late in fiscal 1996, industry sales
of consumer electronics and personal computers weakened, resulting in comparable
store sales declines for the Circuit City Group. That softness continued into
fiscal 1997, with personal computer sales declining even more dramatically
during the second half of that year. The industry's weakness produced an intense
promotional climate and lower average retail prices. Stronger industry sales of
major appliances and fully featured video products, categories in which Circuit
City maintains high market shares, partly offset decreased sales in the other
categories. Based on market research and sales performance, management believes
that Circuit City has gained market share in the major appliance, digital
satellite system and big-screen television product classes during the past year.
The industry weakness has resulted in a significant number of competitive store
closings and reductions in competitor expansion plans. As a result, management
believes that the Circuit City locations continue to maintain substantial shares
in existing markets and to build significant shares in new markets.
Sales By Merchandise Categories*
<TABLE>
<S> <C>
Fiscal 1997 1996 1995 1994 1993
- -----------------------------------------------------------
TV................... 18% 17% 19% 20% 23%
VCR/Camcorders....... 14% 13% 14% 17% 19%
Audio................ 18% 19% 22% 23% 23%
Home Office.......... 24% 26% 20% 12% 7%
Appliances........... 15% 14% 15% 18% 19%
Other................ 11% 11% 10% 10% 9%
------------------------------------
TOTAL................ 100% 100% 100% 100% 100%
-------------------------------------
</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.
The Group sells two extended warranty programs on behalf of unrelated third
parties that issue these plans for merchandise sold by the Group and other
retailers. One of these programs is sold in most major markets and features
in-home service for personal computer products. The second program covers
electronics and major appliances and at the end of fiscal year 1997 was offered
by approximately 85 percent of the Superstores. The remaining stores sell a
Circuit City extended warranty. Gross dollar sales from all extended warranty
programs were 6.0 percent of the Group's total sales in fiscal year 1997,
compared with 5.9 percent in fiscal 1996 and 5.8 percent in fiscal 1995. Total
extended warranty revenue, which is reported in the Group's total sales, was 5.1
percent of sales in fiscal years 1997 and 1996 and 5.4 percent in fiscal year
1995. The gross profit margins on products sold with extended warranties are
higher than the gross profit margins on products sold without extended
warranties. Third-party extended warranty revenue was 3.6 percent of the Group's
total sales in fiscal 1997, 3.0 percent in fiscal 1996 and 2.3 percent in fiscal
1995. The increase reflects the higher percentage of stores selling third-party
contracts. The Group expects third-party extended warranty revenue to continue
increasing in fiscal 1998.
Superstore Sales Per Total Square Foot
<TABLE>
<S> <C>
Fiscal
1997................................................ $499
1996................................................ $577
1995................................................ $584
1994................................................ $523
1993................................................ $487
----
</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. In fiscal 1995, the Group introduced the larger format "D" stores
in some markets. These stores generate high sales volumes in specific trade
areas but lower sales per total square foot than smaller Superstores. As a
result, the Group's Superstore sales per total square foot declined in fiscal
1996. In fiscal 1997, these stores and the decline in comparable store sales
again produced lower Superstore sales per total square foot. Management expects
to reduce the square footage in future "D" stores. This reduction, a greater
overall emphasis on smaller square footage stores and an improvement in
comparable store sales should lead to higher sales per total square foot.
Impact of Inflation. Inflation has not been a significant contributor to the
Group's results. In fact, during the past year, the average retail price has
declined in virtually all of the Group's product categories. Management expects
no significant short-term change in this trend. Because the Group purchases
substantially all products, including consumer electronics, in U.S. dollars,
prices are not directly impacted by the value of the dollar in relation to other
foreign currencies, including the Japanese yen.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin was 24.0 percent of sales in fiscal 1997, up from 23.9
percent in fiscal 1996 but down from 25.1 percent in fiscal 1995. The lower
gross margins in fiscal years 1997 and 1996 versus fiscal year 1995 reflect weak
industry sales and the resulting intensity in the promotional climate and a
higher mix of personal computer sales. The lower margin in fiscal 1996 also
reflects a higher mix of personal computer sales, which produce gross profit
margins lower than the Group's average. In fiscal 1997, promotional pressure was
offset by a reduction in personal computer sales when compared with the prior
year and an increase in major appliance, digital satellite system and big-screen
television sales.
39
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 20.4 percent of sales
in fiscal 1997 from 19.2 percent in fiscal 1996 and 19.9 percent in fiscal 1995.
The increase primarily reflects the impact of comparable store sales declines
and the less favorable productivity of larger-square-footage stores. These
factors were partly offset by an ongoing focus on maximizing store productivity
and corporate overhead efficiency and a net contribution from the credit card
bank subsidiary. Operating profits generated by Circuit City's credit card bank
subsidiary are recorded as a reduction to the Group's selling, general and
administrative expenses. Throughout the past three years, the subsidiary has
benefited from a generally low interest rate environment, which lowers the
bank's cost of funds.
INTEREST EXPENSE
Interest expense was 0.3 percent of sales in fiscal 1997 and 1996 and 0.2
percent in fiscal 1995. Interest expense was incurred on allocated debt used to
fund store expansion and working capital. The increase from fiscal 1995 to
fiscal 1996 reflects higher interest rates, increased long-term debt and higher
short-term borrowings resulting from the Group's growth.
INCOME TAXES
The Group's effective income tax rate was 38.2 percent in fiscal 1997 and 37.6
percent in both fiscal 1996 and fiscal 1995. The increase in the tax rate for
fiscal 1997 reflects increased sales in states with higher tax rates.
EARNINGS BEFORE THE INTER-GROUP
INTEREST IN THE CARMAX GROUP
Earnings before the Inter-Group Interest in the CarMax Group declined 21 percent
to $145.7 million in fiscal 1997. In fiscal 1996, earnings before the
Inter-Group Interest were $184.6 million, a 7 percent increase from $172.0
million in fiscal 1995.
RETURN ON SALES
Return on sales before the Inter-Group Interest in the CarMax Group was 2.0
percent in fiscal 1997 compared with 2.8 percent in fiscal 1996 and 3.1 percent
in fiscal 1995.
NET LOSS RELATED TO THE INTER-GROUP
INTEREST IN THE CARMAX GROUP
The CarMax Group has incurred losses, as anticipated, during the testing stage
and with the initiation of the first phase of its national roll out announced in
fiscal 1997. The net loss attributable to the Circuit City Group's Inter-Group
Interest in the CarMax Group was $9.1 million in fiscal 1997, $5.2 million in
fiscal 1996 and $4.1 million in fiscal 1995.
NET EARNINGS
Net earnings for the Circuit City Group were $136.7 million in fiscal 1997,
$179.4 million in fiscal 1996 and $167.9 million in fiscal 1995. Net earnings
per share were $1.38 in fiscal 1997, $1.82 in fiscal 1996 and $1.72 in fiscal
1995. The lower earnings in fiscal 1997 reflect the challenging industry
environment faced by the Group and the higher losses incurred by the CarMax
Group in fiscal 1997 versus fiscal 1996.
OPERATIONS OUTLOOK
Management believes that continued investment in Circuit City's Superstore
expansion will maximize long-term shareholder value. Management estimates that
in fiscal 1998 the remaining markets suitable for Superstore expansion will
represent $29 billion of the consumer electronics, home office, major appliance
and music software industry's total retail sales potential of $83 billion. By
the year 2000, Circuit City expects to expand the Superstore base into most of
these markets. In fiscal 1998, the Group expects to open approximately 60
Superstores, including an estimated 30 "C" stores. The majority of the openings
will be "A", "B" and "C" stores. New-market entries will comprise 35 to 40 of
the new Superstores, including approximately 15 in the New York City market and
entries into Indianapolis, Ind.; Dayton and Columbus, Ohio; and numerous smaller
markets. The Group also plans to replace 10 to 15 stores and add Circuit City
Express stores.
Management believes that a modest upturn in the industry would produce
stronger sales growth than experienced in fiscal 1997. Management remains
cautious but optimistic in its fiscal 1998 outlook, given the
weaker-than-expected sales during the second half of fiscal 1997 and limited new
product introductions. Growth for the full year will be influenced by the timing
and strength of a pickup in the industry and new product introductions, such as
DVD, or digital video disc.
The intense promotional climate in the second half of fiscal 1996 and in
fiscal 1997 has prompted some industry consolidation, which management believes
will continue in fiscal 1998. Although the rationalization of industry square
footage may produce a short-term negative effect on the Group's sales and gross
margin, it should have a positive impact over the long term as the Circuit City
stores gain a portion of the vacated market share. Management believes that the
Group's financial condition and in-store execution leave it well-positioned
competitively. Management believes this competitive position, an upturn in the
industry and the Group's continued expansion represent substantial long-term
earnings potential.
Management expects CarMax to generate results in fiscal 1998 similar to
those in fiscal 1997 and to generate profits by fiscal 1999. The CarMax results
will be reflected in the Circuit City Group's Inter-Group Interest.
40
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Early application is not
permitted. This statement establishes new standards for computing and presenting
earnings per share. The Circuit City Group has not determined the impact of SFAS
No. 128 on its earnings per share computations and presentation.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1997, net cash provided by operating activities was $39.7 million
compared with $71.5 million used in operating activities in fiscal 1996 and
$115.0 million provided by operating activities in fiscal 1995. The fiscal 1997
improvement primarily reflects less rapid growth in inventory and a higher
increase in accounts payable offset by an increase in accounts receivable and
lower net earnings. The fiscal 1996 decrease in cash principally reflects the
limited earnings growth and lower increases in the provision for deferred income
taxes and in accounts payable, accrued expenses, other current liabilities and
accrued income taxes.
Capital expenditures have been funded through sale-leaseback transactions,
landlord reimbursements and allocated short-and long-term debt. Capital
expenditures of $451.6 million in fiscal 1997 principally reflect Superstores
opened during the year and a portion of the Superstores opening in fiscal 1998.
The sale-leaseback and landlord reimbursement transactions completed in fiscal
1997 totaled $316.3 million and were largely related to real estate purchased in
fiscal 1997 and fiscal 1996. Capital expenditures of $491.4 million in fiscal
1996 and $342.4 million in fiscal 1995 largely were incurred in connection with
the Superstore expansion program.
The Company's credit card bank subsidiary primarily funds its credit card
programs through securitization transactions, which allow the subsidiary to sell
the receivables while retaining a small interest in the receivables. The
subsidiary has a master trust securitization facility for its private-label
credit card that allows the transfer of up to $1.22 billion in receivables
through both private placement and the public market. A second securitization
program allows for the transfer of up to $1.45 billion in receivables related to
the subsidiary's bankcard programs. Under the securitization programs,
receivables are sold to an unaffiliated third party with the servicing retained.
Management expects that these securitization programs can be expanded to
accommodate future receivables growth.
The Group relies on Circuit City Stores, Inc. external debt allocated to
the Group to provide working capital needed to fund net assets not otherwise
disposed of through sale-leasebacks or the securitization of receivables. All
significant financial activities of the Group are managed by the Company on a
centralized basis and are dependent on the financial condition of Circuit City
Stores, Inc. Such financial activities include the investment of surplus cash,
issuance and repayment of debt, securitization of receivables and
sale-leasebacks of real estate.
Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3
million through the initial public offering of 21.86 million shares of newly
created CarMax Group Common Stock. At the end of fiscal 1997, the Circuit City
Group retained a 77.5 percent interest in the equity of the CarMax Group.
Therefore, the offering had the effect of increasing equity for the Circuit City
Group by $323.9 million.
Management believes that proceeds from sales of property and equipment and
receivables, future increases in Circuit City Stores, Inc. debt allocated to the
Circuit City Group and cash generated by operations will be sufficient to fund
the Circuit City Group's capital expenditures and operations. In fiscal 1998,
the Group anticipates capital expenditures of approximately $480 million.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995,
which became law in December 1995, provide companies with a "safe harbor" when
making forward-looking statements. This "safe harbor" encourages companies to
provide prospective information about their companies without fear of
litigation. The Company wishes to take advantage of the new "safe harbor"
provisions of the Act and has included a section in "Management's Discussion and
Analysis" for Circuit City Stores, Inc. in order to do so. Company statements
that are not historical facts, including statements about management's
expectations for fiscal year 1998 and beyond, are forward-looking statements and
involve various risks and uncertainties. Refer to the Circuit City Stores, Inc.
"Management's Discussion and Analysis" for a review of possible risks and
uncertainties.
41
<PAGE>
<TABLE>
<S> <C>
CIRCUIT CITY GROUP STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------------------------------------------------------
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 % 1996 % 1995 %
- ------------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES................. $ 7,153,562 100.0 $ 6,753,266 100.0 $5,505,945 100.0
Cost of sales, buying and warehousing............ 5,435,923 76.0 5,142,009 76.1 4,125,800 74.9
--------------------------------------------------------------------------
GROSS PROFIT..................................... 1,717,639 24.0 1,611,257 23.9 1,380,145 25.1
--------------------------------------------------------------------------
Selling, general and administrative
expenses [NOTES 3 AND 10]..................... 1,458,183 20.4 1,293,990 19.2 1,095,578 19.9
Interest expense [NOTES 3 AND 5]................. 23,503 0.3 21,325 0.3 8,985 0.2
--------------------------------------------------------------------------
TOTAL EXPENSES................................... 1,481,686 20.7 1,315,315 19.5 1,104,563 20.1
--------------------------------------------------------------------------
Earnings before income taxes and Inter-Group
Interest in the CarMax Group.................. 235,953 3.3 295,942 4.4 275,582 5.0
Provision for income taxes [NOTES 3 AND 6]....... 90,221 1.3 111,332 1.6 103,600 1.9
--------------------------------------------------------------------------
EARNINGS BEFORE INTER-GROUP INTEREST
IN THE CARMAX GROUP........................... 145,732 2.0 184,610 2.8 171,982 3.1
Net loss related to Inter-Group Interest in the
CarMax Group [NOTE 2]......................... 9,052 0.1 5,235 0.1 4,107 0.1
--------------------------------------------------------------------------
NET EARNINGS..................................... $ 136,680 1.9 $ 179,375 2.7 $ 167,875 3.0
--------------------------------------------------------------------------
Weighted average common shares and
common share equivalents...................... 99,342 98,546 97,369
----------- ----------- ----------
NET EARNINGS PER SHARE [NOTE 2].................. $ 1.38 $ 1.82 $ 1.72
----------- ----------- ----------
See accompanying notes to group financial statements.
42
<PAGE>
CIRCUIT CITY GROUP BALANCE SHEETS
At February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 32,222 $ 41,485
Net accounts and notes receivable [NOTE 11]............................................ 503,624 307,833
Merchandise inventory.................................................................. 1,310,103 1,261,511
Deferred income taxes [NOTE 6]......................................................... 23,764 29,272
Prepaid expenses and other current assets.............................................. 10,711 16,627
--------------------------------
TOTAL CURRENT ASSETS................................................................... 1,880,424 1,656,728
Property and equipment, net [NOTES 4 AND 5]............................................ 793,917 754,405
Inter-Group Interest in the CarMax Group [NOTE 2]...................................... 303,657 -
Other assets........................................................................... 30,258 16,080
--------------------------------
TOTAL ASSETS .......................................................................... $ 3,008,256 $ 2,427,213
--------------------------------
LIABILITIES AND GROUP EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt [NOTES 5 AND 9]................................. $ 1,490 $ 1,436
Accounts payable....................................................................... 692,461 592,089
Short-term debt [NOTE 5]............................................................... 347 74,037
Inter-group payable [NOTE 3]........................................................... 48,147 -
Accrued expenses and other current liabilities......................................... 103,441 122,625
Accrued income taxes................................................................... 8,560 9,375
--------------------------------
TOTAL CURRENT LIABILITIES.............................................................. 854,446 799,562
Long-term debt, excluding current installments [NOTES 5 AND 9]......................... 430,290 320,642
Deferred revenue and other liabilities................................................. 163,700 212,563
Inter-Group Interest in the CarMax Group [NOTE 2]...................................... - 11,201
Deferred income taxes [NOTE 6]......................................................... 33,123 19,324
--------------------------------
TOTAL LIABILITIES...................................................................... 1,481,559 1,363,292
GROUP EQUITY........................................................................... 1,526,697 1,063,921
--------------------------------
Commitments and contingent liabilities [NOTES 1, 8, 9, 11, 12 AND 13]
TOTAL LIABILITIES AND GROUP EQUITY..................................................... $ 3,008,256 $ 2,427,213
--------------------------------
See accompanying notes to group financial statements.
43
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings..................................................... $ 136,680 $ 179,375 $ 167,875
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Net loss related to Inter-Group Interest in the CarMax Group.. 9,052 5,235 4,107
Depreciation and amortization................................. 97,313 78,991 66,607
(Gain) loss on sales of property and equipment................ (1,540) 5,600 2,199
Provision for deferred income taxes........................... 19,307 21,301 73,333
Decrease in deferred revenue and other liabilities............ (48,863) (28,604) (27,102)
Increase in net accounts and notes receivable................. (195,791) (87,594) (41,574)
Increase in merchandise inventory, prepaid expenses and other
current assets............................................. (42,676) (275,260) (281,394)
(Increase) decrease in other assets........................... (14,178) 1,911 (3,819)
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes........ 80,373 27,579 154,757
------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............. 39,677 (71,466) 114,989
------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (451,561) (491,399) (342,416)
Proceeds from sales of property and equipment.................... 316,276 225,704 137,181
------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES............................ (135,285) (265,695) (205,235)
-------------------------------------------------------
FINANCING ACTIVITIES:
(Payments on) proceeds from issuance of short-term debt, net..... (73,690) 74,037 -
Increase in inter-group payable.................................. 48,147 - -
Proceeds from issuance of long-term debt, net.................... 109,702 252,724 62,263
Equity issuances, net............................................ 15,385 18,245 8,352
Dividends paid................................................... (13,199) (11,163) (9,155)
-------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 86,345 333,843 61,460
------------------------------------------------------
Decrease in cash and cash equivalents............................... (9,263) (3,318) (28,786)
Cash and cash equivalents at beginning of year...................... 41,485 44,803 73,589
------------------------------------------------------
Cash and cash equivalents at end of year............................ $ 32,222 $ 41,485 $ 44,803
------------------------------------------------------
See accompanying notes to group financial statements.
44
<PAGE>
CIRCUIT CITY GROUP STATEMENTS OF GROUP EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
BALANCE AT MARCH 1, 1994....................................................................................... $ 710,392
-----------
Net earnings................................................................................................ 167,875
Equity issuances, net....................................................................................... 8,352
Cash dividends.............................................................................................. (9,155)
-----------
BALANCE AT FEBRUARY 28, 1995................................................................................... 877,464
-----------
Net earnings................................................................................................ 179,375
Equity issuances, net....................................................................................... 18,245
Cash dividends.............................................................................................. (11,163)
-----------
BALANCE AT FEBRUARY 29, 1996................................................................................... 1,063,921
-----------
Net earnings................................................................................................ 136,680
Equity issuances, net....................................................................................... 15,385
Cash dividends.............................................................................................. (13,199)
Inter-Group Interest adjustment resulting from the Offering [NOTE 2]........................................ 323,910
-----------
BALANCE AT FEBRUARY 28, 1997................................................................................... $ 1,526,697
-----------
</TABLE>
See accompanying notes to group financial statements.
45
<PAGE>
NOTES TO CIRCUIT CITY GROUP FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On January 24, 1997, the shareholders of Circuit City Stores, Inc. and its
subsidiaries (the "Company") authorized a restructuring of the existing common
stock of the Company into two new series of common stock intended to reflect
separately the performance of the Company's two main businesses - the consumer
electronics, major appliance, personal computer and music software retail
business, including its interest in the CarMax Group referred to below (the
"Circuit City Group"), and the used- and new-car retail business (the "CarMax
Group").
Subsequent to shareholder approval, the board of directors approved the
redesignation of each share of the Company's existing common stock as a share of
a new series of common stock called Circuit City Stores, Inc.-Circuit City Group
Common Stock, par value $0.50 per share ("Circuit City Stock"), which is
intended to reflect separately the performance of the Circuit City Group, which
is generally comprised of (i) the Company's consumer electronics, major
appliance, personal computer and music software retail business, (ii) an
interest in the CarMax Group, which excludes the interest represented by any
outstanding shares of CarMax Stock, as described below, and (iii) all other
businesses in which the Company may be engaged (other than those comprising the
CarMax Group). For presentation purposes, this redesignation of the Company's
common stock has been treated as if it occurred as of the beginning of the
earliest period presented in the accompanying financial statements. In addition,
the board of directors authorized the designation and issuance of shares of a
new series of common stock called Circuit City Stores, Inc.-CarMax Group Common
Stock, par value $0.50 per share ("CarMax Stock"), which is intended to reflect
separately the performance of the used- and new-car retail business that
comprises the CarMax Group. The Circuit City Group and the CarMax Group are
sometimes referred to collectively as the "Groups" and individually as a
"Group."
On February 7, 1997, the Company completed an offering of 21,860,000 shares
of CarMax Stock for cash in a public offering (the "Offering") for $20.00 per
share aggregating $437.2 million in proceeds before deducting related expenses
of $24.9 million. The Company allocated the net proceeds of the Offering to the
CarMax Group. Upon completion of the Offering and without giving effect to
options, the outstanding CarMax Stock represented 22.5 percent of the equity
value of the CarMax Group, and the Circuit City Group held a 77.5 percent
interest (the "Inter-Group Interest") in the equity value of the CarMax Group.
The Circuit City Group financial statements give effect to the management
and allocation policies adopted by the board of directors, as described under
"Corporate Activities" below. The Circuit City Group financial statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (i) the historical financial position, results of
operations and cash flows of the Circuit City Group, (ii) an allocated portion
of the Company's debt, including the related effects upon results of operations
and cash flows, (iii) an allocated portion of the Company's corporate general
and administrative costs and (iv) the Inter-Group Interest held by the Circuit
City Group in the CarMax Group.
Holders of Circuit City Stock and holders of CarMax Stock are shareholders
of the Company and continue to be subject to all of the risks associated with an
investment in the Company and all of its businesses, assets and liabilities. The
financial results of the Circuit City Group and of the CarMax Group could affect
the market price of either series of stock or the assets legally available for
payment of dividends. Accordingly, the Circuit City Group's financial
information should be read in conjunction with the Company's consolidated
financial information and the CarMax Group's financial information.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) Cash and Cash Equivalents: No cash equivalents were allocated to the Circuit
City Group at February 28, 1997. Cash equivalents of $10,113,000 at February 29,
1996, consist of highly liquid debt securities with original maturities of three
months or less.
(B) Fair Value of Financial Instruments: The Company enters into financial
instruments on behalf of the Circuit City Group. The carrying value of the
Circuit City Group's financial instruments, excluding interest rate swaps held
for hedging purposes, approximates fair value. Credit risk is the exposure to
the potential nonperformance of another material party to an agreement due to
changes in economic, industry or geographic factors and is mitigated by dealing
only with counterparties that are highly rated by several financial rating
agencies. Accordingly, the Circuit City Group does not anticipate loss for
nonperformance. All financial instruments are broadly diversified along
industry, product and geographic areas.
(C) Merchandise Inventory: Inventory is stated at the lower of cost or market.
Cost is determined by the average cost method.
(D) Property and Equipment: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the assets' estimated useful
lives, which range from three to 25 years.
Property held under capital leases is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(E) Pre-opening Expenses: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
46
(F) Income Taxes: Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for income tax purposes, measured by applying
currently enacted tax laws. A deferred tax asset is recognized if it is more
likely than not that a benefit will be realized.
(G) Deferred Revenue: The Circuit City Group sells its own extended warranty
contracts and extended warranty contracts on behalf of unrelated third parties.
The contracts extend beyond the normal manufacturer's warranty period, usually
with terms (including the manufacturer's warranty period) between 12 and 60
months. All revenue from the sale of the Circuit City Group's own extended
warranty contracts is deferred and amortized on a straight-line basis over the
life of the contracts. Incremental direct costs related to the sale of contracts
are deferred and charged to expense in proportion to the revenue recognized. All
other costs are charged to expense as incurred. Commission revenue for the
unrelated third-party extended warranty plans is recognized at the time of sale.
(H) Inter-Group Interest: Prior to the Offering, the Circuit City Group had a
100 percent Inter-Group Interest in the CarMax Group. Following completion of
the Offering, the Circuit City Group held a 77.5 percent Inter-Group Interest in
the CarMax Group. For purposes of these group financial statements, the Circuit
City Group accounts for the Inter-Group Interest in a manner similar to the
equity method of accounting. Accordingly, the Circuit City Group's Inter-Group
Interest in the equity value of the Company attributable to the CarMax Group has
been reflected as "Inter-Group Interest in the CarMax Group" on the Circuit City
Group balance sheets. Similarly, the net losses of the CarMax Group attributable
to the Circuit City Group's Inter-Group Interest are reflected as "Net loss
related to Inter-Group Interest in the CarMax Group" on the Circuit City Group
statements of earnings. All amounts corresponding to the Circuit City Group's
Inter-Group Interest in the CarMax Group in these group financial statements
represent the Circuit City Group's proportional interest in the businesses,
assets and liabilities and income and expenses of the CarMax Group.
The carrying value of the Circuit City Group's Inter-Group Interest in the
CarMax Group has been decreased proportionally for the net loss of the CarMax
Group. In addition, in the event of any dividend or other distribution on CarMax
Stock, an amount that is proportionate to the aggregate amount so paid in
respect to shares of CarMax Stock would be transferred to the Circuit City Group
from the CarMax Group with respect to its Inter-Group Interest and would reduce
the related book value.
(I) Selling, General and Administrative Expenses: Operating profits generated by
financing operations are recorded as a reduction to selling, general and
administrative expenses.
(J) Advertising Expenses: All advertising costs are expensed as incurred.
(K) Net Earnings Per Share: Net earnings per share for Circuit City Stock is
computed by dividing net earnings attributable to Circuit City Stock, including
the Circuit City Group's 100 percent interest in the losses of the CarMax Group
for periods prior to the Offering and the Circuit City Group's 77.5 percent
interest in the CarMax Group subsequent to the Offering, by the weighted average
number of shares of Circuit City Stock and dilutive Circuit City Stock
equivalents outstanding.
(L) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and to provide the
pro forma disclosure provisions of SFAS No. 123.
(M) Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities: In fiscal 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Adoption of SFAS No. 125 did not have a material impact
on the Circuit City Group's financial position, results of operations or
liquidity.
(N) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of: The
Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on March 1,
1996. Impairment of long-lived assets is recognized when the carrying amounts of
the impaired assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less the cost
to sell. Adoption of SFAS No. 121 did not have a material impact on the Circuit
City Group's financial position, results of operations or liquidity.
(O) Risks and Uncertainties: The Circuit City Group is the nation's largest
retailer of brand-name consumer electronics and major appliances and a leading
retailer of personal computers and music software. The diversity of the Circuit
City Group's products, customers, suppliers and geographic operations
significantly reduces the risk that a severe impact will occur in the near term
as a result of changes in its customer base, competition, sources of supply or
markets. It is unlikely that any one event would have a severe impact on the
Circuit City Group's operating results.
47
Because of the Inter-Group Interest, the Circuit City Group also is subject
to risks and uncertainties related to the CarMax Group. The diversity of the
CarMax Group's customers and suppliers reduces the risk that a severe impact
will occur in the near term as a result of changes in its customer base,
competition or sources of supply. The CarMax Group's operations currently are
concentrated in the southeastern United States. A severe economic downturn in
the southeastern United States could negatively impact the CarMax Group's
operating results. Due to the CarMax Group's geographic concentration and
limited overall size, management cannot assure that unanticipated events will
not have a negative impact on the Circuit City Group.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
(P) Reclassifications: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1997.
3. CORPORATE ACTIVITIES
The Circuit City Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) Financial Activities: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Allocated debt of the Circuit City Group consists of (i) Company debt, if any,
that has been allocated in its entirety to the Circuit City Group and (ii) a
portion of the Company's debt that is allocated between the Groups ("pooled
debt"). The pooled debt bears interest at a rate based on the average pooled
debt balance. Expenses related to increases in pooled debt are reflected in the
weighted average interest rate of such pooled debt as a whole.
In addition to the allocation of cash and debt, interest-bearing loans,
with terms determined by the board of directors, are used to manage cash between
the Groups. These loans are reflected as an inter-group payable on the balance
sheet.
(B) Corporate General and Administrative Costs: Corporate general and
administrative costs and other shared services generally have been allocated to
the Circuit City Group based upon utilization of such services by the Group.
Where determinations based on utilization alone have been impractical, other
methods and criteria were used that management believes are equitable and
provide a reasonable estimate of the costs attributable to the Group.
(C) Income Taxes: The Circuit City Group is included in the consolidated federal
income tax return and certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to the respective Group. Tax benefits that cannot be used by
the Group generating such attributes, but can be utilized on a consolidated
basis, are allocated to the Group that generated such benefits. As a result, the
allocated Group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the Groups had filed separate
tax returns.
4. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 or 29 is summarized as follows:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- ---------------------------------------------------------------
Land and buildings (20 to 25 years)... $ 116,638 $ 85,263
Construction in progress.............. 88,779 188,790
Furniture, fixtures and equipment
(3 to 8 years)..................... 496,657 384,330
Leasehold improvements (10 to 15 years) 427,322 350,696
Capital leases, primarily buildings
(20 years)......................... 12,471 13,140
-----------------------
1,141,867 1,022,219
Less accumulated depreciation and
amortization....................... 347,950 267,814
-----------------------
PROPERTY AND EQUIPMENT, NET........... $ 793,917 $ 754,405
-----------------------
5. DEBT
Long-term pooled debt of the Company at February 28 or 29 is summarized as
follows:
(AMOUNTS IN THOUSANDS) 1997 1996
- --------------------------------------------------------------
Term loans.............................. $ 405,000 $ 275,000
Short-term debt expected to be
refinanced........................... - 100,000
Industrial Development Revenue
Bonds due through 2006 at various
prime-based rates of interest ranging
from 5.4% to 7.0%.................... 13,706 12,393
Obligations under capital leases [NOTE 9] 13,074 13,204
---------------------
Total long-term debt.................... 431,780 400,597
Less current installments............... 1,490 1,436
---------------------
Long-term debt, excluding
current installments................. $ 430,290 $ 399,161
---------------------
Portion of long-term debt allocated to
Circuit City Group................... $ 431,780 $ 322,078
---------------------
</TABLE>
48
<PAGE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1997, the interest rate on the term loan was 5.86 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1997, the interest rate
on the term loan was 5.80 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1997, the interest rate
on the term loan was 5.73 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with five banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2001. The agreement provides for annual one-year extensions of the
final maturity beginning on or before August 31, 1997, and each August 31
thereafter. No amounts were outstanding under the revolving credit agreement at
February 28, 1997, or February 29, 1996.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$14,575,000 at February 28, 1997, and $13,073,000 at February 29, 1996.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1997, and February 29, 1996.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------
Average short-term debt
outstanding....................... $186,569 $185,789
-------------------
Maximum short-term debt
outstanding....................... $580,000 $479,000
-------------------
Aggregate committed lines
of credit......................... $415,000 $255,000
-------------------
</TABLE>
The weighted average interest rate on the outstanding short-term debt was
5.4 percent during fiscal 1997, 5.9 percent during fiscal 1996 and 5.3 percent
during fiscal 1995.
Interest expense allocated by the Company to the Circuit City Group,
excluding interest capitalized, was $23,502,965 in fiscal 1997, $21,325,263 in
fiscal 1996 and $8,984,907 in fiscal 1995. The Circuit City Group capitalizes
interest in connection with the construction of certain facilities. In fiscal
1997, interest capitalized amounted to $6,072,000 ($5,466,000 in fiscal 1996 and
$3,670,000 in fiscal 1995).
6. INCOME TAXES
The components of the provision for income taxes on earnings before income taxes
and Inter-Group Interest in the CarMax Group follow:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------
Current:
Federal................. $62,649 $ 84,348 $ 23,786
State................... 8,265 5,683 6,481
-----------------------------
70,914 90,031 30,267
-----------------------------
Deferred:
Federal................. 18,150 18,047 68,719
State................... 1,157 3,254 4,614
-----------------------------
19,307 21,301 73,333
-----------------------------
Provision for income taxes. $90,221 $111,332 $103,600
-----------------------------
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
1997 1996 1995
- ------------------------------------------------------------
Federal statutory income
tax rate....................... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit......... 3.2 2.6 2.6
-----------------------
Effective income tax rate......... 38.2% 37.6% 37.6%
-----------------------
49
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1997, and February 29, 1996, are as follows:
(AMOUNTS IN THOUSANDS) 1997 1996
- ---------------------------------------------------------
Deferred tax assets:
Deferred revenue.................... $ 9,421 $22,655
Inventory capitalization............ 8,871 5,691
Accrued expenses.................... 29,981 34,190
Other............................... 2,690 3,090
-----------------
Total gross deferred tax assets.. 50,963 65,626
Deferred tax liabilities:
Depreciation and amortization....... 42,544 39,448
Prepaid benefit programs............ - 886
Other prepaid expenses.............. 7,351 6,333
Other............................... 10,427 9,011
-----------------
Total gross deferred tax
liabilities.................... 60,322 55,678
-----------------
Net deferred tax (liability) asset..... $ (9,359) $ 9,948
-----------------
</TABLE>
Of the gross deferred tax assets at February 28, 1997, and February 29,
1996, approximately $46 million and $59 million, respectively, can be realized
by carrybacks or offsetting of deferred tax liabilities. Based on the Circuit
City Group's historical and current pre-tax earnings, management believes the
remaining amount will be realized through future taxable income; therefore, no
valuation allowance is necessary.
7. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) Preferred Stock: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of Circuit City Stock. The
rights are exercisable only upon the attainment of, or the commencement of a
tender offer to attain, a specified ownership interest in the Company by a
person or group. When exercisable, each Circuit City Group right would entitle
shareholders to buy one four-hundredth of a share of Cumulative Participating
Preferred Stock, Series E, $20 par value, at an exercise price of $35 per share
subject to adjustment. A total of 500,000 shares of such preferred stock, which
have preferential dividend and liquidation rights, has been designated; 300,000
shares have been reserved. No such shares are outstanding. In the event that an
acquiring person or group acquires the specified ownership percentage of the
Company's common stock (except pursuant to a cash tender offer for all
outstanding shares determined to be fair by continuing directors) or engages in
certain transactions with the Company after the rights become exercisable, each
right will be converted into a right to purchase, for half the current market
price at that time, shares of the related Group stock valued at two times the
exercise price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding and an additional 500,000 shares
of preferred stock designated as Series F which are related to similar rights
held by CarMax Group shareholders.
(B) Voting Rights: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters on which
common shareholders generally are entitled to vote other than a matter on which
the common stock or either series thereof or any series of preferred stock would
be entitled to vote as a separate voting group. On all matters on which both
series of common stock would vote together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) Restricted Stock: The Company has issued restricted stock under the
provisions of the 1994 and 1988 Stock Incentive Plans whereby key employees are
granted restricted shares of Circuit City Stock. Shares are awarded in the name
of the employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire three
years from the date of grant. In fiscal 1997, restricted stock awards for
254,745 shares were granted to eligible employees. The market value of these
shares has been recorded as unearned compensation and is a component of
stockholder's equity. Unearned compensation is expensed over the restriction
periods. In fiscal 1997, a total of $3,790,200 was charged to Circuit City Group
operations ($3,362,500 in 1996 and $2,552,500 in 1995). As of February 28, 1997,
570,609 restricted shares were outstanding.
(D) Employee Stock Purchase Plan: The Company has an Employee Stock Purchase
Plan for all employees meeting certain eligibility criteria. Under the Plan,
eligible employees may purchase shares of Circuit City Stock, subject to certain
limitations, at 85 percent of its market value. Purchases are limited to 10
percent of an employee's eligible compensation, up to a maximum of $7,500 per
year. All shares have been redesignated as Circuit City Stock. At February 28,
1997, a total of 563,068 shares remained available under the Plan. During fiscal
1997, 499,338 shares were issued to or purchased on the open market for
employees (474,889 in fiscal 1996 and 537,467 in fiscal 1995). The average price
per share was $32.68 in fiscal 1997, $29.97 in fiscal 1996 and $22.23 in
50
fiscal 1995. The purchase price discount is charged to Circuit City Group
operations and totaled $2,433,600 in fiscal 1997, $2,030,000 in fiscal 1996 and
$1,760,200 in fiscal 1995.
(E) Stock Incentive Plans: Under the Company's stock incentive plans, incentive
and non-qualified stock options may be granted to management, key employees and
outside directors to purchase shares of Circuit City Stock. The exercise price
for incentive stock options for employees and non-qualified options for outside
directors is equal to, or greater than, the market value at the date of grant;
for non-qualified options granted under the 1988 Plan for employees, it is at
least 85 percent of the market value at the date of grant (100 percent under the
1994 Plan). Options generally are exercisable over a period of from one to 10
years from the date of grant.
A summary of the status of the Circuit City Group's stock options and
changes during the years ended February 28 or 29 is shown in Table 1. Table 2
summarizes information about stock options outstanding as of February 28, 1997.
The Circuit City Group applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value at the grant date consistent with the methods of SFAS
No. 123, the Circuit City Group's net earnings and net earnings per share would
have been reduced to the pro forma amounts indicated below. In accordance with
the transition provisions of SFAS No. 123, the pro forma amounts reflect options
with grant dates subsequent to March 1, 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net earnings amounts presented below because
compensation cost is reflected over the options' vesting periods and
compensation cost of options granted prior to March 1, 1995, is not considered.
The pro forma effect on fiscal year 1997 may not be representative of the pro
forma effects on net earnings for future years.
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS Years Ended February 28 or 29
EXCEPT PER SHARE DATA) 1997 1996
- ---------------------------------------------------------------
Net earnings-as reported............. $136,680 $179,375
Net earnings-pro forma............... 133,326 178,325
Net earnings per share-as reported... $ 1.38 $ 1.82
Net earnings per share-pro forma..... 1.34 1.81
</TABLE>
For the purpose of computing the pro forma amounts indicated above, the
fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model. The weighted average assumptions used in the
model are as follows:
<TABLE>
<S> <C>
1997 1996
Expected dividend yield................... 0.4% 0.4%
Expected stock volatility................. 33% 35%
Risk-free interest rates.................. 6% 7%
Expected lives (in years)................. 4 4
</TABLE>
Using these assumptions in the Black-Scholes model, the weighted average
fair value of options granted for the Circuit City Group is $8 in fiscal 1997
and $9 in fiscal 1996.
<TABLE>
<S> <C>
Table 1 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(SHARES IN THOUSANDS) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year............ 3,563 $18.63 3,709 $17.14 3,594 $16.69
Granted..................................... 2,159 43.38 763 22.98 750 18.34
Exercised................................... (786) 17.67 (645) 12.64 (260) 10.18
Canceled.................................... (108) 21.90 (264) 24.06 (375) 19.41
---- ---- ----
Outstanding at end of year.................. 4,828 $29.76 3,563 $18.63 3,709 $17.14
----- ----- -----
Options exercisable at end of year.......... 1,629 $17.24 1,847 $16.19 2,070 $15.70
----- ----- -----
Table 2 Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average
(SHARES IN THOUSANDS) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
$ 5.94 to 10.56.................................... 285 1.0 $ 8.59 285 $ 8.59
13.19 to 20.13.................................... 1,306 2.7 16.81 886 16.09
22.50 to 29.13.................................... 1,057 3.9 23.62 445 24.63
29.50 to 36.88.................................... 1,180 7.2 29.97 13 34.47
59.00............................................. 1,000 6.0 59.00 - -
----- -----
Total.............................................. 4,828 4.6 $29.76 1,629 $17.24
----- -----
</TABLE>
51
8. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of this program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1997, and February 29, 1996.
Eligible employees of the Circuit City Group participate in the Company's
plan. Pension costs for these employees have been allocated to the Circuit City
Group based on its proportionate share of the projected benefit obligation.
The components of net pension expense for the Circuit City Group are as
follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- ----------------------------------------------------------
Service cost of benefits earned
during the year........... $ 9,226 $5,756 $4,451
Interest cost on projected
benefit obligation........ 4,667 3,606 2,710
Actual return on plan assets. (9,783) (9,149) (101)
Net amortization............. 6,830 6,227 (3,434)
---------------------------
Net pension expense.......... $10,940 $6,440 $3,626
---------------------------
The following table sets forth the Circuit City Group's share of the Plan's
financial status and amounts recognized in the balance sheets as of February 28
or 29:
(AMOUNTS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested.............................. $ 43,367 $39,263
Non-vested.......................... 5,290 5,104
-----------------
Total benefits......................... 48,657 44,367
Additional amounts related to projected
salary increases.................... 21,398 22,532
-----------------
Projected benefit obligation for services
rendered to date.................... 70,055 66,899
Plan assets at fair value.............. (62,033) (46,444)
Projected benefit obligation in excess of
plan assets......................... 8,022 20,455
Unrecognized gain (loss) from past
experience.......................... 3,276 (13,922)
Unrecognized prior service cost........ 760 863
Unrecognized net obligation being
recognized over 15 years............ 996 1,195
-----------------
Accrued pension cost................... $ 13,054 $ 8,591
-----------------
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
1997 1996 1995
- -------------------------------------------------------------
Weighted average discount rate...... 7.5% 7.0% 8.0%
Rate of increase in compensation
levels............................ 5.5% 6.0% 6.5%
Rate of return on plan assets....... 9.0% 9.0% 8.0%
--------------------
</TABLE>
9. LEASE COMMITMENTS
The Circuit City Group conducts a substantial portion of its business in leased
premises. The Circuit City Group's lease obligations are based upon contractual
minimum rates. For certain locations, amounts in excess of these minimum rates
are payable based upon specified percentages of sales. Rental expense and
sublease income for all operating leases are summarized as follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------
Minimum rentals.............. $178,599 $144,232 $117,012
Rentals based on sales
volume............. 2,322 2,871 2,513
Sublease income.............. (11,121) (9,996) (8,875)
----------------------------
Net.......................... $169,800 $137,107 $110,650
----------------------------
</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, some with rent
escalations based on the Consumer Price Index. Most provide that the Circuit
City Group pay taxes, maintenance, insurance and certain other operating
expenses applicable to the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 25 years at terms substantially the same as the initial
terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Circuit City Group, as of February 28, 1997,
were:
<TABLE>
<S> <C>
Operating Operating
Fiscal Capital Lease Sublease
(AMOUNTS IN THOUSANDS) Leases Commitments Income
1998.......................... $ 1,541 $ 200,406 $ (11,526)
1999.......................... 1,579 198,170 (10,281)
2000.......................... 1,662 196,194 (9,379)
2001.......................... 1,681 195,064 (8,311)
2002.......................... 1,725 191,911 (7,353)
After 2002.................... 19,958 2,201,090 (42,526)
--------------------------------
Total minimum lease payments.. 28,146 $3,182,835 $ (89,376)
----------------------
Less amounts representing
interest................... 15,072
-------
Present value of net
minimum capital lease
payments [NOTE 5].......... $13,074
-------
</TABLE>
52
In fiscal 1997, the Company entered into sale-leaseback transactions on
behalf of the Circuit City Group with unrelated parties at an aggregate selling
price of $185,244,000 ($158,150,000 in fiscal 1996 and $71,670,000 in fiscal
1995). Neither the Company nor the Circuit City Group has continuing involvement
under the sale-leaseback transactions.
10. SUPPLEMENTARY INCOME
STATEMENT INFORMATION
Advertising expense, which is included in selling, general and administrative
expenses in the accompanying statements of earnings, amounted to $342,777,000
(4.8 percent of net sales and operating revenues) in fiscal 1997, $317,181,000
(4.7 percent of net sales and operating revenues) in fiscal 1996 and
$260,767,000 (4.7 percent of net sales and operating revenues) in fiscal 1995.
11. SECURITIZATIONS
On behalf of the Circuit City Group, the Company enters into securitization
transactions, which allow for the sale of credit card receivables to unrelated
entities, to finance the consumer revolving credit receivables generated by
First North American National Bank (the "Bank Subsidiary"), a wholly owned
credit card bank subsidiary of the Company. The Circuit City Group implemented
SFAS No. 125 with respect to sales of credit card receivables occurring after
December 31, 1996. Proceeds from securitization transactions were $551.1 million
for fiscal 1997, $692.3 million for fiscal 1996 and $428.4 million for fiscal
1995.
At February 28 or 29 the following amounts were outstanding:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------
Securitized receivables......... $2,594,651 $1,860,459
Interest retained by Circuit
City Group................... (293,586) (110,459)
Net receivables transferred..... $2,301,065 $1,750,000
-------------------------
Net receivables transferred
with recourse................ $1,317,565 $ 760,000
-------------------------
Program capacity................ $2,665,000 $1,910,000
-------------------------
</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 1997, the Bank Subsidiary placed an additional $225 million in the
public market for a total program capacity of $1,215 million. The master trust
vehicle permits further expansion of the securitization programs to meet future
receivables growth. The agreements have no recourse provisions.
In addition, the Bank Subsidiary has an asset securitization program in
place for its bank card receivables that allows, as of February 28, 1997, the
transfer of up to $1,450 million in receivables. The bank card securitization
agreements provide recourse to the Group for any cash flow deficiencies. The
Group believes that as of February 28, 1997, no liability existed under these
recourse provisions. The finance charges from the transferred receivables are
used to fund interest costs, charge-offs, servicing fees and other related
costs.
The Bank Subsidiary's servicing revenue, including gains on sales of
receivables of $3.7 million in fiscal 1997, totaled $197.0 million for fiscal
1997, $142.9 million for fiscal 1996 and $77.8 million for fiscal 1995. The
servicing fees specified in the credit card securitization agreements adequately
compensate the Bank Subsidiary for servicing the accounts. Accordingly, no
servicing asset or liability has been recorded. Rights recorded for future
interest income from serviced assets that exceed the contractually specified
servicing fees are carried at fair value and amounted to $3.2 million at
February 28, 1997, and are included in net accounts receivable.
12. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year interest rate swaps on
behalf of the Circuit City Group with notional amounts totaling $300 million
relating to a public issuance of securities by the master trust. As part of this
issuance, $344 million of five-year, fixed-rate certificates were issued to fund
consumer credit receivables. The Bank Subsidiary is servicer for the accounts,
and as such, receives its monthly cash portfolio yield after deducting interest,
charge-offs and other related costs. The underlying receivables are based on a
floating rate. The swaps were put in place to better match funding costs to the
receivables being securitized. As a result, the master trust pays fixed-rate
interest while the Company utilizes the swaps to convert the fixed-rate
obligation to a floating rate, LIBOR-based obligation. The fair value of the
swaps is the amount at which they could be settled based on estimates obtained
from the counterparties, which are two banks highly rated by several financial
rating agencies.The swaps are held for hedging purposes and are not recorded at
fair value. Recording the swaps at fair value at February 28, 1997, would result
in a gain of $10.9 million, and at February 29, 1996, would result in a gain of
$19.4 million.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties, which are two banks highly rated by
several financial rating agencies. The swaps are held for hedging purposes and
are not recorded at fair value. Recording the swaps at fair value at February
28, 1997, would result in a gain of $0.1 million and at February 29, 1996, would
result in a loss of $2.5 million.
53
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The Circuit City Group does not anticipate significant market risk from swaps,
since their use is to more closely match funding costs to the use of the
funding. Credit risk is the exposure to nonperformance of another party to an
agreement. Credit risk is mitigated by dealing with highly rated counterparties.
13. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the Circuit City Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the Circuit City
Group's financial position, liquidity or results of operations.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS First Quarter Second Quarter Third Quarter Fourth Quarter Year
EXCEPT PER SHARE DATA) -----------------------------------------------------------------------------------
1997 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues....... $1,490,572 $1,634,827 $1,745,538 $2,282,625 $7,153,562
-----------------------------------------------------------------------------------
Gross profit........................... $ 350,151 $ 385,381 $ 414,604 $ 567,503 $1,717,639
-----------------------------------------------------------------------------------
Earnings before Inter-Group
Interest in the CarMax Group........ $ 16,345 $ 32,631 $ 23,700 $ 73,056 $ 145,732
-----------------------------------------------------------------------------------
Net earnings........................... $ 16,783 $ 31,583 $ 19,787 $ 68,527 $ 136,680
-----------------------------------------------------------------------------------
Net earnings per share................. $ 0.17 $ 0.32 $ 0.20 $ 0.69 $ 1.38
-----------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the Circuit City Group (as
defined in Note 1) as of February 28, 1997 and February 29, 1996 and the related
statements of earnings, group equity and cash flows for each of the fiscal years
in the three-year period ended February 28, 1997. These financial statements are
the responsibility of Circuit City Stores, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the Circuit
City Group should be read in conjunction with the consolidated financial
statements of Circuit City Stores, Inc. and subsidiaries and the financial
statements of the CarMax Group.
The Circuit City Group has accounted for its interest in the CarMax Group
in a manner similar to the equity method of accounting. Generally accepted
accounting principles require that the CarMax Group be consolidated with the
Circuit City Group.
In our opinion, except for the effects of not consolidating the Circuit
City Group and the CarMax Group as discussed in the preceding paragraph, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Circuit City Group as of February 28, 1997 and
February 29, 1996 and the results of its operations and its cash flows for each
of the fiscal years in the three-year period ended February 28, 1997 in
conformity with generally accepted accounting principles.
/s/KPMG Peat Markwick LLP
Richmond, Virginia
April 3, 1997
54
<PAGE>
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
On January 24, 1997, Circuit City Stores, Inc. shareholders approved the
creation of two common stock series. The Company's existing common stock was
subsequently redesignated as Circuit City Stores, Inc.-Circuit City Group Common
Stock. In an initial public offering, which was completed February 7, 1997, the
Company sold 21.86 million shares of Circuit City Stores, Inc.-CarMax Group
Common Stock.
The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations and a retained interest
in the CarMax Group. The effects of this retained interest on the Circuit City
Group's Financial Statements are identified by the term "Inter-Group." All other
line items relate to Circuit City operations.
The CarMax Group Common Stock is intended to track separately the
performance of the CarMax operations. The CarMax interest held by the Circuit
City Group is not considered outstanding CarMax Group stock. Therefore, any net
earnings or loss attributable to the Circuit City Group's interest is not
included in the CarMax Group's per share calculations.
The following discussion and analysis refers to the CarMax Group. Reported
losses attributable to the CarMax Group Common Stock reflect the Circuit City
Group's 100 percent interest in the losses of the CarMax Group prior to the
consummation of the offering on February 7, 1997, and the Circuit City Group's
77.5 percent interest in the CarMax Group from the offering to the end of fiscal
year 1997. For additional information, refer to the "Management's Discussion and
Analysis of Results of Operations and Financial Condition" for Circuit City
Stores, Inc. and for the Circuit City Group.
RESULTS OF OPERATIONS
SALES GROWTH
Total sales for the CarMax Group increased 85 percent in fiscal 1997, to $510.3
million. In fiscal 1996, total sales increased 258 percent to $275.9 million
from $77.0 million in fiscal 1995. The fiscal 1997 sales growth primarily
reflects the addition of three locations and a 23 percent comparable store sales
increase for two locations classified as comparable stores throughout the year
and two locations classified as comparable stores for a portion of the year.
Early in fiscal 1997, CarMax began selling new vehicles at its largest store in
Norcross, Ga., under the terms of a franchise agreement with Chrysler
Corporation. That store is included in the comparable store base. The fiscal
1996 growth includes two additional stores, a 12 percent comparable store sales
increase for one location classified as a comparable store throughout the year
and a second location classified as a comparable store for a portion of the
year. The fiscal 1995 sales increase includes the addition of a second store and
a 43 percent comparable store sales increase for one store classified as
comparable for a portion of the year.
Three different store formats, which vary in acreage, vehicle assortment
and facility square footage allow the Group to tailor its operations to the
populations and volume expectations for specific trade areas. A typical "C"
store will have 24 to 28 acres with room to display up to 1,000 used vehicles
and showroom, reconditioning and service facilities totaling about 92,000 square
feet. The typical "B" format store will cover 20 to 23 acres, have room to
display up to 800 used vehicles and include facilities with a total of
approximately 74,000 square feet. The "A" format will typically cover 15 to 19
acres, have room for up to 600 used vehicles and include facilities that total
about 57,000 square feet. All formats will include additional display room for
new cars.
Store Mix
<TABLE>
<S> <C>
February 28 or 29
1997 1996 1995 1994
- ----------------------------------------------------------
"C" Store................ 1 1 - -
"B" Store................ 3 - - -
"A" Store................ 3 3 2 1
-----------------------------
TOTAL.................... 7 4 2 1
----------------------------
</TABLE>
In most states, CarMax sells extended warranties on behalf of an unrelated
third party and has no contractual liability to the customer under the warranty
program. In states where third-party warranty sales are not feasible, CarMax
sells its own extended warranty. Gross dollar sales from all extended warranty
programs were 3.5 percent of the Group's total sales in fiscal 1997, 3.8 percent
in fiscal 1996 and 3.3 percent in fiscal 1995. Total extended warranty revenue,
which is reported in the Group's total sales, was 1.2 percent of total sales in
fiscal 1997, 1.4 percent in fiscal 1996 and 0.5 percent in fiscal 1995.
Third-party extended warranty revenue was 1.1 percent of total sales in fiscal
1997, 1.3 percent in fiscal 1996 and 0.4 percent in fiscal 1995. The lower
extended warranty percentages in fiscal 1997 reflect the additional sales of new
cars, which are covered by manufacturers' warranties.
Impact of Inflation. Inflation has not been a significant contributor to the
Group's results. Management expects that increases in vehicle pricing would have
a positive impact on the CarMax Group's sales and earnings.
COST OF SALES
The CarMax marketing concept includes a strong commitment to providing a high
level of consumer value. CarMax attempts to price vehicles at or below the best
negotiated price in the market. As a result, CarMax operates with lower gross
profit margins than industry averages for used-vehicle dealerships. The gross
profit margin was 8.5 percent in fiscal 1997, 8.6 percent in fiscal 1996 and 6.3
percent in fiscal 1995. The lower gross profit margin in fiscal 1997 primarily
reflects the addition of the new-car franchise. New cars produce a lower
55
gross margin than used cars. Improved inventory management, including optimizing
each store's vehicle mix and display based on local market demand, contributed
to the margin increase in fiscal 1996. Cost of sales includes vehicle cost,
reconditioning costs, transportation and other purchasing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
CarMax's consumer-oriented marketing concept produces store volumes
significantly higher than industry averages. As a result, management also
expects selling, general and administrative expenses to be relatively lower as a
percentage of sales than industry averages. Selling, general and administrative
expenses were 10.4 percent of sales in fiscal 1997, 10.3 percent in fiscal 1996
and 14.0 percent in fiscal 1995. Since CarMax's inception, increased sales from
new stores, comparable store sales growth, an increase in servicing revenue from
the CarMax Group's financing unit and the addition of the Chrysler franchise
have leveraged expenses. These expenses have included start-up costs, Group
overhead expenses and expenses associated with the planned national roll out of
CarMax Superstores.
Operating profits generated by CarMax's consumer installment lending
division and fees received for arranging financing through third parties are
recorded as a reduction to selling, general and administrative expenses.
INTEREST EXPENSE
Interest expense was 1.2 percent of sales in fiscal 1997, 1.5 percent in fiscal
1996 and 1.4 percent in fiscal 1995. Interest expense was incurred on allocated
debt used primarily to fund store expansion and working capital. The decrease in
interest expense as a percentage of sales in fiscal 1997 reflects the repayment
of Circuit City debt allocated to the CarMax Group, using funds raised through
the CarMax equity offering; an improved level of inventory per store; and the
securitization of the installment receivables generated by the CarMax Group's
financing unit. Management believes that proceeds from the recent equity
offering and improved inventory management will further reduce interest expense
in fiscal 1998.
PRE-TAX LOSSES
Management anticipated that CarMax would produce a loss in its initial test
stage and increased losses early in the first phase of a national roll out.
Pre-tax losses totaled $15.9 million in fiscal 1997, $8.9 million in fiscal 1996
and $7.0 million in fiscal 1995. All five stores open throughout fiscal 1997,
including the Charlotte location, which opened on March 4, 1996, were producing
an operating profit including profits from vehicle financing, but before the
allocation of Group overhead expenses, at year-end.
INCOME TAXES
The Group's effective income tax rate was 41.5 percent in both fiscal 1997 and
1996 and 41.2 percent in fiscal 1995. The CarMax Group generated losses in all
reported periods and as a result has recorded related income tax benefits.
Compared with the Circuit City Group, this Group experienced relatively higher
state income tax rates because, as members of the consolidated Company for state
tax purposes, the CarMax Group is subject to income tax in states in which it
presently does not conduct business. The tax rate is expected to decline as the
Group expands geographically into additional states.
NET LOSSES
Net losses totaled $9.3 million in fiscal 1997, $5.2 million in fiscal 1996 and
$4.1 million in fiscal 1995. For the period from the offering date to the end of
fiscal 1997, the net loss attributable to the CarMax Group common stock was
$266,000. The net loss per CarMax Group share for the same period was 1 cent.
The remainder of the loss was attributable to the Circuit City Group.
OPERATIONS OUTLOOK
CarMax has begun the first phase of a national roll out that includes a planned
total store count of 80 to 90 locations by the end of fiscal 2002. The planned
roll out includes approximately 10 additional stores in fiscal year 1998 and 15
to 20 openings per year thereafter. CarMax also will continue to explore
opportunities in new-car retailing. In less than five months of operation, the
Chrysler franchise location surpassed the annual planning volume established by
Chrysler. As a result, CarMax expects to add at least 25 new-car franchises to
its used-car Superstore locations by the end of fiscal 2002. Management intends
to add value by acquiring underperforming new-car franchises or franchise grants
from automobile manufacturers. The Group currently provides repair service in
four locations. Limited service is available on used vehicles at other
locations. Management plans to expand its retail repair service offering in all
locations going forward.
Management expects CarMax to generate results in fiscal 1998 similar to
those in fiscal 1997 and to generate profits by fiscal year 1999. Management
believes the increased costs of Group overhead and infrastructure to support the
rapid roll out plan will be partly offset by expense leverage from increased
sales in fiscal 1998.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Early application is not
permitted. This statement establishes new standards for computing and presenting
earnings per share. The CarMax Group has not determined the impact of SFAS No.
128 on its earnings (loss) per share computations and presentation.
56
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1997, net cash used in operating activities was $25.4 million compared
with $16.1 million provided by operating activities in fiscal 1996 and $68.0
million used in operating activities in fiscal 1995. The decrease in cash in
fiscal 1997 primarily reflects an increase in net accounts receivable, greater
inventory to support new store openings and the addition of the new-car
franchise, and a higher net loss, which were partly offset by an increase in
accounts payable. The fiscal 1996 cash increase principally reflects a decrease
in net accounts receivable resulting from the sale of installment loan
receivables through securitizations, as described below, and a lower rate of
inventory growth than sales growth.
The CarMax Group's capital expenditures were $90.4 million in fiscal 1997,
$26.8 million in fiscal 1996 and $33.0 million in fiscal 1995. Most of CarMax's
capital expenditures through fiscal 1997 related to the opening of its seven
existing stores, its reconditioning center and stores scheduled to open during
fiscal 1998.
The auto loan securitization program was started in fiscal 1996 with
securitized receivables totaling $87.0 million at February 29, 1996. At February
28, 1997, securitized receivables totaled $145.0 million. Under the
securitization program, receivables are sold to an unaffiliated third party with
the servicing retained. Management expects that the existing securitization
program can be increased to accommodate receivables as CarMax grows.
The Group has relied on Circuit City Stores, Inc.'s allocated external debt
to provide working capital needed to fund net assets not otherwise disposed of
through sale-leasebacks or the securitization of receivables. All significant
financial activities of the Group are managed by the Company on a centralized
basis and are dependent on the financial condition of Circuit City Stores, Inc.
Such financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
Late in fiscal 1997, Circuit City Stores, Inc. raised a net of $412.3
million through the initial public offering of 21.86 million shares of newly
created CarMax Group Common Stock. The Group used approximately $187 million of
the net proceeds to repay its allocated portion of Circuit City Stores, Inc.
indebtedness. Management expects to use the remainder of the net proceeds to
finance part of the CarMax expansion plan.
Management believes that the proceeds of the offering, proceeds from sales
of property and equipment and receivables, future increases in Circuit City
Stores, Inc. debt allocated to the CarMax Group and cash generated by operations
will be sufficient to fund the CarMax Group's capital expenditures and
operations. In fiscal 1998, the Group anticipates capital expenditures of
approximately $350 million.
FORWARD-LOOKING STATEMENTS
The provisions of the Private Securities Litigation Reform Act of 1995, which
became law in December 1995, provide companies with a "safe harbor" when making
forward-looking statements. This "safe harbor" encourages companies to provide
prospective information about their companies without fear of litigation. The
Company wishes to take advantage of the new "safe harbor" provisions of the Act
and has included a section in "Management's Discussion and Analysis" for Circuit
City Stores, Inc. in order to do so. Company statements that are not historical
facts, including statements about management's expectations for fiscal year 1998
and beyond, are forward-looking statements and involve various risks and
uncertainties. Refer to the Circuit City Stores, Inc. "Management's Discussion
and Analysis" for a review of the possible risks and uncertainties.
57
<PAGE>
<TABLE>
<S> <C>
CARMAX GROUP STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
YEARS ENDED FEBRUARY 28 OR 29
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1997 % 1996 % 1995 %
- -----------------------------------------------------------------------------------------------------------------------------
NET SALES AND OPERATING REVENUES................... $ 510,249 100.0 $ 275,857 100.0 $77,002 100.0
Cost of sales...................................... 466,788 91.5 252,284 91.4 72,147 93.7
-------------------------------------------------------------------------
GROSS PROFIT....................................... 43,461 8.5 23,573 8.6 4,855 6.3
-------------------------------------------------------------------------
Selling, general and administrative
expenses [NOTES 3 AND 12]....................... 53,111 10.4 28,440 10.3 10,792 14.0
Interest expense [NOTE 6].......................... 6,279 1.2 4,075 1.5 1,045 1.4
-------------------------------------------------------------------------
TOTAL EXPENSES..................................... 59,390 11.6 32,515 11.8 11,837 15.4
-------------------------------------------------------------------------
Loss before income tax benefit................ 15,929 3.1 8,942 3.2 6,982 9.1
Income tax benefit [NOTES 3 AND 8]................. 6,611 1.3 3,707 1.3 2,875 3.8
-------------------------------------------------------------------------
NET LOSS........................................... $ 9,318 1.8 $ 5,235 1.9 $ 4,107 5.3
-------------------------------------------------------------------------
Net loss attributable to [NOTES 1 AND 2]:
Circuit City Group common stock................. $ 9,052 $ 5,235 $ 4,107
--------- --------- -------
CarMax Group common stock....................... 266
---------
$ 9,318
Weighted average common shares..................... 21,860
---------
NET LOSS PER SHARE [NOTE 2]........................ $ 0.01
---------
See accompanying notes to group financial statements.
58
<PAGE>
CARMAX GROUP BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------------------
At February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 170,421 $ 2,219
Net accounts receivable [NOTE 4]....................................................... 28,350 16,562
Inter-group receivable [NOTE 3]........................................................ 48,147 -
Inventory.............................................................................. 82,260 61,672
Prepaid expenses and other current assets.............................................. 4,102 772
--------------------------------
TOTAL CURRENT ASSETS................................................................... 333,280 81,225
Property and equipment, net [NOTES 5 AND 6]......................................... 92,174 19,860
Deferred income taxes [NOTE 8]......................................................... 42 1,560
Other assets........................................................................... 1,691 -
--------------------------------
TOTAL ASSETS........................................................................... $ 427,187 $ 102,645
--------------------------------
LIABILITIES AND GROUP EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................................................... $ 28,293 $ 12,399
Short-term debt [NOTE 6]............................................................... - 18,050
Deferred income taxes [NOTE 8]......................................................... 2,424 2,276
Accrued expenses and other current liabilities......................................... 2,059 1,164
--------------------------------
TOTAL CURRENT LIABILITIES....................................... 32,776 33,889
Long-term debt [NOTE 6]................................................................ - 78,519
Deferred revenue and other liabilities................................................. 2,595 1,438
--------------------------------
TOTAL LIABILITIES...................................................................... 35,371 113,846
GROUP EQUITY (DEFICIT)................................................................. 391,816 (11,201)
--------------------------------
Commitments and contingent liabilities [NOTES 1, 4, 7, 10, 11 AND 13]
TOTAL LIABILITIES AND GROUP EQUITY (DEFICIT)........................................... $ 427,187 $ 102,645
--------------------------------
See accompanying notes to group financial statements.
59
<PAGE>
CARMAX GROUP STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss............................................................... $ (9,318) $ (5,235) $ (4,107)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation........................................................ 1,664 821 259
Provision for deferred income taxes................................. 1,666 1,110 412
Increase in deferred revenue and other liabilities.................. 1,157 739 608
(Increase) decrease in net accounts receivable...................... (11,788) 27,764 (34,001)
Increase in inventory, prepaid expenses and other current assets.... (23,918) (15,384) (35,720)
Increase in other assets............................................ (1,691) - -
Increase in accounts payable, accrued expenses and other
current liabilities.............................................. 16,789 6,331 4,540
------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.................... (25,439) 16,146 (68,009)
------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................... (90,428) (26,776) (32,990)
Proceeds from sales of property and equipment.......................... 16,450 25,750 14,300
Increase in inter-group receivable..................................... (48,147) - -
------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES.................................. (122,125) (1,026) (18,690)
------------------------------------------------
FINANCING ACTIVITIES:
(Payments on) proceeds from issuance of short-term debt, net........... (18,050) 18,050 -
(Principal payments on) proceeds from issuance of long-term debt, net.. (78,519) (33,110) 87,253
Equity issuances, net.................................................. 412,335 - -
------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................... 315,766 (15,060) 87,253
------------------------------------------------
Increase in cash and cash equivalents................................ 168,202 60 554
Cash and cash equivalents at beginning of year............................ 2,219 2,159 1,605
------------------------------------------------
Cash and cash equivalents at end of year.................................. $ 170,421 $ 2,219 $ 2,159
------------------------------------------------
See accompanying notes to group financial statements.
60
<PAGE>
CARMAX GROUP STATEMENTS OF GROUP EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1994......................................................................................... $ (1,859)
---------
Net loss (4,107)
---------
BALANCE AT FEBRUARY 28, 1995..................................................................................... (5,966)
---------
Net loss...................................................................................................... (5,235)
---------
BALANCE AT FEBRUARY 29, 1996..................................................................................... (11,201)
---------
Net loss...................................................................................................... (9,318)
---------
Equity issuances, net......................................................................................... 412,335
---------
BALANCE AT FEBRUARY 28, 1997..................................................................................... $ 391,816
---------
See accompanying notes to group financial statements.
</TABLE>
61
<PAGE>
NOTES TO CARMAX GROUP FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
On January 24, 1997, the shareholders of Circuit City Stores, Inc. and its
subsidiaries (the "Company") authorized a restructuring of the existing common
stock of the Company into two new series of common stock intended to reflect
separately the performance of the Company's two main businesses - the consumer
electronics, major appliance, personal computer and music software retail
business, including its interest in the CarMax Group referred to below (the
"Circuit City Group"), and the used- and new-car retail business (the "CarMax
Group").
Subsequent to shareholder approval, the board of directors approved the
redesignation of each share of the Company's existing common stock as a share of
a new series of common stock called Circuit City Stores, Inc.-Circuit City Group
Common Stock, par value $0.50 per share ("Circuit City Stock"), which is
intended to reflect separately the performance of the Circuit City Group, which
is generally comprised of (i) the Company's consumer electronics, major
appliance, personal computer and music software retail business, (ii) an
interest in the CarMax Group, which excludes the interest represented by any
outstanding shares of CarMax Stock, as described below, and (iii) all other
businesses in which the Company may be engaged (other than those comprising the
CarMax Group). For presentation purposes, this redesignation of the Company's
common stock has been treated as if it occurred as of the beginning of the
earliest period presented in the accompanying financial statements. In addition,
the board of directors authorized the designation and issuance of shares of a
new series of common stock called Circuit City Stores, Inc.-CarMax Group Common
Stock, par value $0.50 per share ("CarMax Stock"), which is intended to reflect
separately the performance of the used- and new-car retail business that
comprises the CarMax Group. The Circuit City Group and the CarMax Group are
sometimes referred to collectively as the "Groups" and individually as a
"Group."
On February 7, 1997, the Company completed an offering of 21,860,000 shares
of CarMax Stock for cash in a public offering (the "Offering") for $20.00 per
share aggregating $437.2 million in proceeds before deducting related expenses
of $24.9 million. The Company allocated the net proceeds of the Offering to the
CarMax Group. Upon completion of the Offering and without giving effect to
options, the outstanding CarMax Stock represented 22.5 percent of the equity
value of the CarMax Group, and the Circuit City Group held a 77.5 percent
interest (the "Inter-Group Interest") in the equity value of the CarMax Group.
The CarMax Group financial statements give effect to the management and
allocation policies adopted by the board of directors, as described under
"Corporate Activities" below. The CarMax Group financial statements have been
prepared on a basis that management believes to be reasonable and appropriate
and include (i) the historical financial position, results of operations and
cash flows of the CarMax Group, (ii) an allocated portion of the Company's debt,
including the related effects upon results of operations and cash flow and (iii)
an allocated portion of the Company's corporate general and administrative
costs.
Holders of Circuit City Stock and holders of CarMax Stock are shareholders
of the Company and continue to be subject to all of the risks associated with an
investment in the Company and all of its businesses, assets and liabilities. The
financial results of the Circuit City Group and of the CarMax Group could affect
the market price of either series of stock or the assets legally available for
payment of dividends. Accordingly, the CarMax Group's financial information
should be read in conjunction with the Company's consolidated financial
information and the Circuit City Group's financial information.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) Cash and Cash Equivalents: Cash equivalents of $165,975,000 at February 28,
1997, consist of highly liquid debt securities with original maturities of three
months or less. No cash equivalents were allocated to the CarMax Group at
February 29, 1996.
(B) Installment Auto Loan Receivables: Installment auto loan receivables
("installment receivables") held for investment are stated at cost. Installment
receivables held for sale are stated at the lower of cost or market. As of
February 28, 1997, and February 29, 1996, cost approximates market.
(C) Fair Value of Financial Instruments: The Company enters into financial
instruments on behalf of the CarMax Group. The carrying value of the CarMax
Group's financial instruments approximates fair value. Credit risk is the
exposure to the potential nonperformance of another material party to an
agreement due to changes in economic, industry or geographic factors and is
mitigated by dealing only with counterparties that are highly rated by several
financial rating agencies. Accordingly, the CarMax Group does not anticipate
loss for nonperformance. All financial instruments are broadly diversified along
industry, product and geographic areas.
(D) Inventory: Inventory is stated at the lower of cost or market. Vehicle
inventory cost is determined by specific identification. Parts and labor used to
recondition vehicles, as well as transportation and other incremental expenses
associated with acquiring vehicles, are included in inventory.
(E) Property and Equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line
method over the assets' estimated useful lives, which range from three to 15
years.
62
(F) Pre-opening Expenses: Expenses associated with the opening of new stores are
deferred and amortized ratably over the period from the date of the store
opening to the end of the fiscal year.
(G) Income Taxes: Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for income tax purposes, measured by applying
currently enacted tax laws. A deferred tax asset is recognized if it is more
likely than not that a benefit will be realized.
(H) Deferred Revenue: The CarMax Group sells its own service contracts and
service contracts on behalf of unrelated third parties. Contracts usually have
terms of coverage between 12 and 72 months. All revenue from the sale of the
CarMax Group's own service contracts is deferred and amortized over the life of
the contracts consistent with the pattern of repair experience of the industry.
Incremental direct costs related to the sale of contracts are deferred and
charged to expense in proportion to the revenue recognized. All other costs are
charged to expense as incurred. Commission revenue for the unrelated third-party
service contracts is recognized at the time of sale.
(I) Selling, General and Administrative Expenses: Operating profits generated by
financing operations are recorded as a reduction to selling, general and
administrative expenses.
(J) Advertising Expenses: All advertising costs are expensed as incurred.
(K) Net Loss Per Share: Net loss per share for CarMax Stock is computed by
dividing net loss attributable to CarMax Stock by the weighted average number of
shares of CarMax Stock outstanding. Historical net loss per share is omitted
from the statements of operations for periods prior to the Offering since CarMax
Stock was not part of the capital structure of the Company for those periods.
(L) Stock-Based Compensation: On March 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The Company has elected to
continue applying the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and to provide the
pro forma disclosure provisions of SFAS No. 123.
(M) Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities: In fiscal 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. Adoption of SFAS No. 125 did not have a material impact
on the CarMax Group's financial position, results of operations or liquidity.
(N) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of: The
Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on March 1,
1996. Impairment of long-lived assets is recognized when the carrying amounts of
the impaired assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less the cost
to sell. Adoption of SFAS No. 121 did not have a material impact on the CarMax
Group's financial position, results of operations or liquidity.
(O) Risks and Uncertainties: The CarMax Group is a used- and new-car retail
business. The diversity of the CarMax Group's customers and suppliers reduces
the risk that a severe impact will occur in the near term as a result of changes
in its customer base, competition or sources of supply. The CarMax Group's
operations currently are concentrated in the southeastern United States. A
severe economic downturn in the southeastern United States could negatively
impact the CarMax Group's operating results. Due to the CarMax Group's
geographic concentration and limited overall size, management cannot assure that
unanticipated events will not have a negative impact on the Group.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
(P) Reclassifications: Certain amounts in prior years have been reclassified to
conform to classifications adopted in fiscal 1997.
3. CORPORATE ACTIVITIES
The CarMax Group's financial statements reflect the application of the
management and allocation policies adopted by the board of directors to various
corporate activities, as described below:
(A) Financial Activities: Most financial activities are managed by the Company
on a centralized basis. Such financial activities include the investment of
surplus cash and the issuance and repayment of short-term and long-term debt.
Investment of surplus cash from the Offering has been allocated to the CarMax
Group. Allocated debt of the CarMax Group consists of (i) Company debt, if any,
that has been allocated in its entirety to the CarMax Group and (ii) a portion
of the Company's debt that is allocated between the Circuit City Group and the
CarMax Group ("pooled debt"). For the periods covered by the CarMax Group's
financial statements, all debt consists of an allocated portion of the pooled
debt. The
63
pooled debt bears interest at a rate based on the average pooled debt balance.
Expenses related to increases in pooled debt are reflected in the weighted
average interest rate of such pooled debt as a whole.
In addition to the allocation of cash and debt, interest-bearing loans,
with terms determined by the board of directors, are used to manage cash between
the Groups. These loans are reflected as an inter-group receivable on the
balance sheet.
(B) Corporate General and Administrative Costs: Corporate general and
administrative costs and other shared services generally have been allocated to
the CarMax Group based upon utilization of such services by the Group. Where
determinations based on utilization alone have been impractical, other methods
and criteria were used that management believes are equitable and provide a
reasonable estimate of the costs attributable to the Group. Costs allocated to
the CarMax Group totaled approximately $1.3 million for fiscal 1997, $1.8
million for fiscal 1996 and $1.0 million for fiscal 1995.
(C) Income Taxes: The CarMax Group is included in the consolidated federal
income tax return and in certain state tax returns filed by the Company.
Accordingly, the provision for federal income taxes and related payments of tax
are determined on a consolidated basis. The financial statement provision and
the related tax payments or refunds are reflected in each Group's financial
statements in accordance with the Company's tax allocation policy for such
Groups. In general, this policy provides that the consolidated tax provision and
related tax payments or refunds will be allocated between the Groups based
principally upon the financial income, taxable income, credits and other amounts
directly related to the respective Group. Tax benefits that cannot be used by
the Group generating such attributes, but can be utilized on a consolidated
basis, are allocated to the Group that generated such benefits. As a result, the
allocated Group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the Groups had filed separate
tax returns.
4. ACCOUNTS RECEIVABLE AND
SECURITIZATION TRANSACTION
Accounts receivable consist of the following at February 28 or 29:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------
Trade receivables...................... $ 5,977 $ 4,001
Installment receivables held for sale.. 1,770 855
Installment receivables held
for investment...................... 22,465 12,151
-----------------
Total accounts receivable.............. 30,212 17,007
Less allowance for doubtful accounts... 1,862 445
-----------------
Net accounts receivable................ $28,350 $16,562
-----------------
</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 Corporation ("FNAC"), the Group's installment
lending division. Proceeds from the auto loan securitization transaction were
$58 million during fiscal 1997 and $87 million during fiscal 1996. The seasoned
portfolio and more estimable losses allowed the CarMax Group to recognize gains
on the sales of these receivables beginning in fiscal 1997. At February 28 or 29
the following amounts were outstanding:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- ---------------------------------------------------------
Securitized receivables.............. $155,234 $ 93,065
Interest retained by CarMax Group.... (10,234) (6,065)
-------------------
Net receivables transferred.......... $145,000 $ 87,000
-------------------
Program capacity..................... $175,000 $100,000
-------------------
</TABLE>
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. A restructuring of the facility
during fiscal 1997 resulted in the recourse provisions being eliminated.
Servicing revenue for FNAC, including gains on sales of receivables of $4.3
million in fiscal 1997, totaled $8.7 million for fiscal 1997 and $2.0 million
for fiscal 1996 and for fiscal 1995.
The servicing fee specified in the auto loan securitization agreement
adequately compensates FNAC for servicing the loans. Accordingly, no servicing
asset or liability has been recorded. Rights recorded for future interest income
from serviced assets that exceed the contractually specified servicing fee are
carried at fair value and amounted to $3.1 million at February 28, 1997, and are
included in net accounts receivable.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 28 or 29 is summarized as follows:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- ----------------------------------------------------------
Land.................................. $15,489 $ 3,826
Construction in progress.............. 64,052 9,190
Furniture, fixtures and equipment
(3 to 8 years)..................... 9,667 5,515
Leasehold improvements
(10 to 15 years)................... 5,763 2,461
------------------
94,971 20,992
Less accumulated depreciation......... 2,797 1,132
------------------
Property and equipment, net........... $92,174 $19,860
------------------
</TABLE>
64
6. DEBT
Long-term pooled debt of the Company at February 28 or 29 is summarized as
follows:
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS) 1997 1996
- -------------------------------------------------------------
Term loans........................... $ 405,000 $ 275,000
Short-term debt expected to be
refinanced........................ - 100,000
----------------------
Total long-term debt................. $ 405,000 $ 375,000
----------------------
Portion of long-term debt
allocated to CarMax Group......... $ - $ 78,519
----------------------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. The loan was restructured in August 1996 as a
$100,000,000, six-year unsecured bank term loan. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.40 percent. At
February 28, 1997, the interest rate on the term loan was 5.86 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1997, the interest rate
on the term loan was 5.80 percent.
In June 1996, the Company entered into a five-year, $130,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 28, 1997, the interest rate
on the term loan was 5.73 percent.
The Company maintains a multi-year, $150,000,000, unsecured revolving
credit agreement with five banks. The agreement calls for interest based on both
committed rates and money market rates and a commitment fee of 0.13 percent per
annum. The agreement was entered into as of August 31, 1996, and terminates
August 31, 2001. The agreement provides for annual one year extensions of the
final maturity beginning on or before August 31, 1997, and each August 31
thereafter. No amounts were outstanding under the revolving credit agreement at
February 28, 1997, or February 29, 1996.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 28, 1997, and February 29, 1996.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------
Average short-term debt
outstanding.......................... $ 186,569 $185,789
--------------------
Maximum short-term debt
outstanding....................... $ 580,000 $479,000
--------------------
Aggregate committed lines
of credit......................... $ 415,000 $255,000
--------------------
</TABLE>
The weighted average interest rate on the outstanding short-term debt was
5.4 percent during fiscal 1997, 5.9 percent during fiscal 1996 and 5.3 percent
during fiscal 1995.
Interest expense allocated by the Company to the CarMax Group, excluding
interest capitalized, was $6,278,472 in fiscal 1997, $4,074,737 in fiscal 1996
and $1,045,153 in fiscal 1995. The CarMax Group capitalizes interest in
connection with the construction of certain facilities. In fiscal 1997, interest
capitalized amounted to $898,000 ($1,314,000 in fiscal 1996 and $176,000 in
fiscal 1995).
7. INTEREST RATE SWAPS
In November 1995, the Company entered into a 50-month amortizing swap with a
notional amount of $75 million and in October 1996, entered into a 40-month
amortizing swap with a notional amount of $64 million, both on behalf of the
CarMax Group, relating to the auto loan receivable securitization to convert
variable-rate financing costs to a fixed-rate obligation to better match the
funding costs to the receivables being securitized. These swaps were entered
into as part of the sale of receivables and are therefore included in the gain
on the sale of the receivables. The remaining notional amount outstanding under
these swaps was $114 million at February 28, 1997, and $71 million at February
29, 1996.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year interest rate swaps with notional
amounts aggregating $175 million. These swaps effectively converted the
variable-rate obligation into a fixed-rate obligation. The fair value of the
swaps is the amount at which they could be settled. This value is based on
estimates obtained from the counterparties,
65
which are two banks highly rated by several financial rating agencies. The swaps
are held for hedging purposes and are not recorded at fair value. Recording the
swaps at fair value at February 28, 1997, would result in a gain of $0.1 million
and at February 29, 1996, would result in a loss of $2.5 million.
The market and credit risks associated with these interest rate swaps are
similar to those relating to other types of financial instruments. Market risk
is the exposure created by potential fluctuations in interest rates and is
directly related to the product type, agreement terms and transaction volume.
The CarMax Group does not anticipate significant market risk from swaps, since
their use is to more closely match funding costs to the use of the funding.
Credit risk is the exposure to nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated counterparties.
8. INCOME TAXES
The components of the income tax benefit on loss before income tax benefit
follow:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------
Current:
Federal................ $ (6,976) $ (3,670) $ (2,536)
State.................. (1,301) (1,147) (751)
---------------------------------
(8,277) (4,817) (3,287)
---------------------------------
Deferred:
Federal................ 1,689 844 316
State.................. (23) 266 96
---------------------------------
1,666 1,110 412
---------------------------------
Income tax benefit........ $ (6,611) $ (3,707) $ (2,875)
---------------------------------
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
1997 1996 1995
- -----------------------------------------------------------
Federal statutory income
tax rate...................... 35.0% 35.0% 35.0%
State and local income taxes,
net of Federal benefit........ 6.5 6.5 6.2
---------------------
Effective income tax rate........ 41.5% 41.5% 41.2%
---------------------
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 28, 1997, and February 29, 1996, are as follows:
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------
Deferred tax assets:
Deferred revenue...................... $ 583 $1,820
Organization cost capitalization...... 116 92
Accrued expenses...................... 195 -
Other................................. 664 -
----------------
Total gross deferred tax assets.... 1,558 1,912
----------------
Deferred tax liabilities:
Depreciation.......................... 657 352
Prepaid expenses...................... 631 4
Inventory capitalization.............. 1,228 1,907
Gain on sale of receivables........... 1,424 -
Other................................. - 365
----------------
Total gross deferred tax
liabilities...................... 3,940 2,628
----------------
Net deferred tax liability.............. $(2,382) $ (716)
----------------
</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 28, 1997, and February 29, 1996, will be realized by the CarMax Group;
therefore, no valuation allowance is necessary.
9. CAPITAL STOCK AND STOCK INCENTIVE PLAN
(A) Preferred Stock: In conjunction with the Company's Shareholders Rights Plan
as amended and restated, preferred stock purchase rights were distributed as a
dividend at the rate of one right for each share of CarMax Stock. The rights are
exercisable only upon the attainment of, or the commencement of a tender offer
to attain, a specified ownership interest in the Company by a person or group.
When exercisable, each CarMax Group right would entitle shareholders to buy one
four-hundredth of a share of Cumulative Participating Preferred Stock, Series F,
$20 par value, at an exercise price of $22 per share subject to adjustment. A
total of 500,000 shares of such preferred stock, which have preferential
dividend and liquidation rights, have been designated and reserved. No such
shares are outstanding. In the event that an acquiring person or group acquires
the specified ownership percentage of the Company's common stock (except
pursuant to a cash tender offer for all outstanding shares determined to be fair
by continuing directors) or
66
engages in certain transactions with the Company after the rights become
exercisable, each right will be converted into a right to purchase, for half the
current market price at that time, shares of the related Group stock valued at
two times the exercise price.
The Company also has 1,000,000 shares of undesignated preferred stock
authorized of which no shares are outstanding and an additional 500,000 shares
of preferred stock designated as Series E which are related to similar rights
held by Circuit City Group shareholders.
(B) Voting Rights: The holders of both series of common stock and any series of
preferred stock outstanding and entitled to vote together with the holders of
common stock will vote together as a single voting group on all matters as to
which common shareholders generally are entitled to vote other than a matter on
which the common stock or either series thereof or any series of preferred stock
would be entitled to vote as a separate voting group. On all matters on which
both series of common stock would vote together as a single voting group, (i)
each outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes based on the
weighted average ratio of the market value of a share of CarMax Stock to a share
of Circuit City Stock. If shares of only one series of common stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of common stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
(C) Stock Incentive Plan: As of February 28, 1997, there were outstanding
options to purchase shares of stock of the corporate entity comprising the
CarMax Group. These options are held by management and key employees of the
CarMax Group and vest evenly on the third, fourth and fifth anniversary of the
grant date with a maximum option term of seven years. The exercise price is
equal to, or greater than, the fair market value of the stock at the date of
grant. The Company intends to convert these options into options to purchase
CarMax Stock, preserving the aggregate intrinsic value of the options. In
addition, the vesting provisions and option periods of the original grants will
remain the same when converted.
A summary of the status of the CarMax Group's stock options, assuming
conversion, and changes during the years ended February 28 or 29 are shown in
Table 1. Table 2 summarizes information about stock options outstanding as of
February 28, 1997.
<TABLE>
<S> <C>
TABLE 1 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
(SHARES IN THOUSANDS) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year......... 4,278 $0.22 3,518 $ 0.22 - $ -
Granted.................................. 961 1.68 796 0.22 3,518 0.22
Exercised................................ - - - - - -
Cancelled................................ (470) 0.27 (36) 0.22 - -
------- ------- ------
Outstanding at end of year.............. 4,769 $0.51 4,278 $ 0.22 3,518 $ 0.22
------- ------- ------
Options exercisable at end of year....... - $ - - $ - - $ -
------- ------- ------
Table 2 Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------
Weighted Average
(SHARES IN THOUSANDS) Number Remaining Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
$ 0.22....................................... 4,540 5.0 $ 0.22 - $ -
6.25....................................... 229 5.0 6.25 - -
----- ------
Total........................................ 4,769 5.0 $ 0.51 - $ -
----- ------
</TABLE>
67
The CarMax Group applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized. Had compensation cost been determined based on the fair value
at the grant date consistent with the methods of SFAS No. 123, the CarMax
Group's net loss and net loss per share would not have been materially different
than reported.
10. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering the
majority of full-time employees who are at least age 21 and have completed one
year of service. The cost of the program is being funded currently. Plan
benefits generally are based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of
Circuit City Stock at February 28, 1997, and February 29, 1996.
Eligible employees of the CarMax Group participate in the Company's plan.
Pension costs for these employees have been allocated to the CarMax Group based
on its proportionate share of the projected benefit obligation.
The components of net pension expense for the CarMax Group are as follows:
<TABLE>
<S> <C>
Years Ended February 28 or 29
(AMOUNTS IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------
Service cost of benefits earned
during the year............. $ 162 $ 140 $ 34
Interest cost on projected
benefit obligation.......... 34 26 5
Actual return on plan assets... (120) (128) (1)
Net amortization............... 78 87 (18)
--------------------------
Net pension expense............ $ 154 $ 125 $ 20
--------------------------
The following table sets forth the CarMax Group's share of the Plan's
financial status and amounts recognized in the balance sheets as of February 28
or 29:
(AMOUNTS IN THOUSANDS) 1997 1996
- -----------------------------------------------------------
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested................................ $ 201 $ 242
Non-vested............................ 111 32
----------------
Total benefits........................... 312 274
Additional amounts related to projected
salary increases...................... 209 215
----------------
Projected benefit obligation for services
rendered to date...................... 521 489
Plan assets at fair value................ (895) (649)
----------------
Plan assets in excess of projected
benefit obligation.................... (374) (160)
Unrecognized gain (loss) from past
experience............................ 52 (195)
Unrecognized prior service cost.......... 10 12
Unrecognized net obligation being
recognized over 15 years.............. 14 17
----------------
Prepaid pension cost..................... $(298) $(326)
----------------
Assumptions used in the accounting for the pension plan were:
Years Ended February 28 or 29
1997 1996 1995
Weighted average discount rate...... 7.5% 7.0% 8.0%
Rate of increase in compensation
levels........................... 5.5% 6.0% 6.5%
Rate of return on plan assets....... 9.0% 9.0% 8.0%
---------------------
</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 $6,019,000 in fiscal 1997,
$3,850,000 in fiscal 1996 and $1,030,000 in fiscal 1995. Most leases provide
that the CarMax Group pay taxes, maintenance, insurance and certain other
operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of from eight years to 28 years at terms substantially the same as the
initial terms.
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the CarMax Group, as of February 28, 1997, were:
<TABLE>
<S> <C>
Operating
Fiscal Lease
(AMOUNTS IN THOUSANDS) Commitments
1998............................................ $ 6,419
1999............................................ 6,417
2000............................................ 6,292
2001............................................ 6,253
2002............................................ 6,253
After 2002...................................... 92,832
--------
Total minimum lease payments.................... $124,466
--------
</TABLE>
In fiscal 1997, the Company entered into sale-leaseback transactions on
behalf of the CarMax Group with unrelated parties at an aggregate selling price
of $16,450,000 ($25,750,000 in fiscal 1996 and $14,300,000 in fiscal 1995).
Neither the Company nor the CarMax Group has continuing involvement under the
sale-leaseback transactions.
68
12. SUPPLEMENTARY INCOME
STATEMENT INFORMATION
Advertising expense, which is included in selling, general and administrative
expenses in the accompanying statements of operations, amounted to $11,493,000
(2.3 percent of net sales and operating revenues) in fiscal 1997, $7,154,000
(2.6 percent of net sales and operating revenues) in fiscal 1996 and $2,202,000
(2.9 percent of net sales and operating revenues) in fiscal 1995.
13. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the CarMax Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operation.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<S> <C>
(AMOUNTS IN THOUSANDS First Quarter Second Quarter Third Quarter Fourth Quarter Year
EXCEPT PER SHARE DATA) ------------------------------------------------------------------------------
1997 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------
Net sales and operating revenues............... $124,694 $132,216 $118,409 $134,930 $510,249
---------------------------------------------------------------------------
Gross profit................................... $ 12,119 $ 10,947 $ 8,255 $ 12,140 $ 43,461
---------------------------------------------------------------------------
Net loss attributable to CarMax Stock.......... $ - $ - $ - $ (266) $ (266)
---------------------------------------------------------------------------
Net loss per share............................. $ - $ - $ - $ (0.01) $ (0.01)
---------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders of Circuit City Stores, Inc.:
We have audited the accompanying balance sheets of the CarMax Group (as defined
in Note 1) as of February 28, 1997 and February 29, 1996 and the related
statements of operations, group equity (deficit) and cash flows for each of the
fiscal years in the three-year period ended February 28, 1997. These financial
statements are the responsibility of Circuit City Stores, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1, the financial statements of the CarMax
Group should be read in conjunction with the consolidated financial statements
of Circuit City Stores, Inc. and subsidiaries and the financial statements of
the Circuit City Group.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the CarMax Group as of
February 28, 1997 and February 29, 1996 and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
February 28, 1997 in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1997
69
EXHIBIT 21
CIRCUIT CITY STORES, INC.
Subsidiaries of the Company
Jurisdiction of
Incorporation
Subsidiary or Organization
---------- ---------------
CC Distribution Company of Virginia, Inc. Virginia
Circuit City Stores West Coast, Inc. California
First North American National Bank National Bank
Located in Georgia
Northern National Insurance Ltd. Bermuda
Patapsco Designs, Inc. Maryland
CarMax, Inc. Virginia
CarMax Auto Superstores, Inc. Virginia
C-Max Auto Superstores, Inc. California
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
Circuit City Stores, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-56697, 33-50144, 33-36650, 33-22874, 33-64757, 333-02971, 33-20303,
333-22759, 333-25451 AND 333-27933) on Form S-8 of Circuit City Stores, Inc.
of our reports dated April 3, 1997, relating to the consolidated balance sheets
of Circuit City Stores, Inc. and subsidiaries (the Company) as of February 28,
1997 and February 29, 1996, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the fiscal years in the
three-year period ended February 28, 1997, and the related financial statement
schedule, which reports are included, or incorporated by reference from the
annual report to stockholders, in the February 28, 1997 annual report on Form
10-K of Circuit City Stores, Inc.
We also consent to incorporation by reference in the foregoing registration
statements of our reports dated April 3, 1997, relating to the balance sheets of
the Circuit City Group as of February 28, 1997 and February 29, 1996, and the
related statements of earnings, group equity and cash flows for each of the
fiscal years in the three-year period ended February 28, 1997, and the related
financial statement schedule, which reports are included, or incorporated by
reference from the annual report to stockholders, in the February 28, 1997
annual report on Form 10-K of Circuit City Stores, Inc. Our reports on the
Circuit City Group dated April 3, 1997, include a qualification related to the
effects of not consolidating the CarMax Group with the Circuit City Group as
required by generally accepted accounting principles.
We also consent to incorporation by reference in the foregoing registration
statements of our report dated April 3, 1997, relating to the balance sheets of
the CarMax Group as of February 28, 1997 and February 29, 1996, and the related
statements of operations, group equity (deficit) and cash flows for each of the
fiscal years in the three-year period ended February 28, 1997, and the related
financial statement schedule, which reports are included, or incorporated by
reference from the annual report to stockholders, in the February 28, 1997
annual report on Form 10-K of Circuit City Stores, Inc.
s/KPMG Peat Marwick LLP
Richmond, Virginia
May 28, 1997
EXHIBIT 24
POWER OF ATTORNEY
I hereby appoint Richard L. Sharp, my true and lawful attorney-in-fact
to sign on my behalf, as an individual and in the capacity stated below, the
Annual Report on Form 10-K of Circuit City Stores, Inc. for its fiscal year
ended February 28, 1997 and any amendment with such attorney-in-fact may deem
appropriate or necessary.
s/ Michael T. Chalifoux
Michael T. Chalifoux
Sr. Vice President
Chief Financial Officer
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Richard N. Cooper
Print Name: Richard N. Cooper
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Barbara S. Feigin
Print Name: Barbara S. Feigin
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Theodore D. Nierenberg
Print Name: Theodore D. Nierenberg
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Hugh G. Robinson
Print Name: Hugh G. Robinson
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Walter J. Salmon
Print Name: Walter J. Salmon
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Mikael Salovaara
Print Name: Mikael Salovaara
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/John W. Snow
Print Name: John W. Snow
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux, my true and lawful
attorney-in-fact to sign on my behalf, as an individual and in the capacity
stated below, the Annual Report on Form 10-K of Circuit City Stores, Inc. for
its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
s/Richard L. Sharp
Richard L. Sharp, Chairman,
Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Edward Villanueva
Print Name: Edward Villanueva
Title: Director
<PAGE>
POWER OF ATTORNEY
I hereby appoint Michael T. Chalifoux or Richard L. Sharp, my true and
lawful attorney-in-fact to sign on my behalf, as an individual and in the
capacity stated below, the Annual Report on Form 10-K of Circuit City Stores,
Inc. for its fiscal year ended February 28, 1997 and any amendment with such
attorney-in-fact may deem appropriate or necessary.
Signature: s/Alan Wurtzel
Print Name: Alan Wurtzel
Title: Vice-Chairman and Director
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Column 1 = CONSOLIDATED
Column 2 = CIRCUIT CITY GROUP
Column 3 = CARMAX GROUP
Changes Caption = Allocation of Inter-Group Interest in CarMax losses
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> Feb-28-1997 Feb-28-1997 Feb-28-1997
<PERIOD-END> Feb-28-1997 Feb-28-1997 Feb-28-1997
<CASH> 202,643 32,222 170,421
<SECURITIES> 0 0 0
<RECEIVABLES> 531,974 503,624 28,350
<ALLOWANCES> 0 0 0
<INVENTORY> 1,392,363 1,310,103 82,260
<CURRENT-ASSETS> 2,163,133 1,880,424 333,280
<PP&E> 1,236,838 1,141,867 94,971
<DEPRECIATION> 350,747 347,950 2,797
<TOTAL-ASSETS> 3,081,173 3,008,256 427,187
<CURRENT-LIABILITIES> 836,651 854,446 32,776
<BONDS> 430,290 430,290 0
0 0 0
0 0 0
<COMMON> 60,019 49,089 10,930
<OTHER-SE> 1,554,837 1,477,608 381,426
<TOTAL-LIABILITY-AND-EQUITY> 3,081,173 3,008,256 427,187
<SALES> 7,633,811 7,153,562 510,249
<TOTAL-REVENUES> 7,633,811 7,153,562 510,249
<CGS> 5,902,711 5,435,923 466,788
<TOTAL-COSTS> 5,902,711 5,435,923 466,788
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 29,782 23,503 6,279
<INCOME-PRETAX> 220,024 235,953 (15,929)
<INCOME-TAX> 83,610 90,221 (6,611)
<INCOME-CONTINUING> 136,414 145,732 (9,318)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 (9,052) 9,052
<NET-INCOME> 136,414 136,680 (266)
<EPS-PRIMARY> 0 1.38 (0.01)
<EPS-DILUTED> 0 1.38 (0.01)
</TABLE>
