AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1997
REGISTRATION NO. 333-15995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CIRCUIT CITY STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 54-0493875
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
9950 MAYLAND DRIVE
RICHMOND, VIRGINIA 23233
(804) 527-4000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
RICHARD L. SHARP, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
CIRCUIT CITY STORES, INC.
9950 MAYLAND DRIVE
RICHMOND, VIRGINIA 23233
(804) 527-4000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C> <C>
ROBERT L. BURRUS, JR., ESQ. RAYMOND W. WAGNER, ESQ.
MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P. SIMPSON THACHER & BARTLETT
ONE JAMES CENTER 425 LEXINGTON AVENUE
RICHMOND, VIRGINIA 23219 NEW YORK, NEW YORK 10017
(804) 775-1000 (212) 455-2000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
------------------------
CALCULATION OF REGISTRATION FEE
[CAPTION]
<TABLE>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE
<S> <C> <C>
Circuit City Stores, Inc. --
CarMax Group Common Stock, par value $.50 per share....................... $368,713,000 $111,732(1)
Rights to Purchase Preferred Stock,
Series F, par value $20.00 per share(2)................................... N/A N/A
Circuit City Stores, Inc. --
Circuit City Group Common Stock, par value $.50 per share(3)(4)........... N/A N/A
Rights to Purchase Preferred Stock,
Series E, par value $20.00 per share(5)................................... N/A N/A
</TABLE>
(1) Fee was calculated pursuant to Rule 457(o) and has been previously paid.
(2) Prior to the occurrence of certain events, the Rights will not be evidenced
or traded separately from the CarMax Group Common Stock. Value, if any, of
the Rights is reflected in the market price of the CarMax Group Common
Stock. Accordingly, no separate fee is paid.
(3) Registered solely because the shares of CarMax Group Common Stock registered
under this Registration Statement may be converted, at the option of the
Registrant, into shares of Circuit City Group Common Stock in accordance
with the terms of the CarMax Group Common Stock.
(4) No additional consideration would be paid by the holders of CarMax Group
Common Stock upon a conversion of the CarMax Group Common Stock into Circuit
City Group Common Stock. Accordingly, no separate fee is paid.
(5) Prior to the occurrence of certain events, the Rights will not be evidenced
or traded separately from the Circuit City Group Common Stock. Value, if
any, of the Rights is reflected in the market price of the Circuit City
Group Common Stock. Accordingly, no separate fee is paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus, one to be used
in connection with the offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with the offering outside the
United States and Canada (the "International Prospectus"). The two prospectuses
are identical except for the front cover page. The form of U.S. Prospectus
included herein is followed by the front cover page to be used in the
International Prospectus. The alternate page for the International Prospectus
included herein is labeled "Alternate Page for International Prospectus."
<PAGE>
(A redherring appears on the left-hand side of this page, rotated 90
degrees. Text follows.)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 30, 1997
18,860,000 SHARES
CIRCUIT CITY STORES, INC. -- CARMAX GROUP
COMMON STOCK
OF
CIRCUIT CITY STORES, INC.
------------------------
OF THE 18,860,000 SHARES OF CARMAX STOCK BEING OFFERED, 15,088,000 SHARES ARE
BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS AND 3,772,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." THE NET PROCEEDS FROM THE OFFERING WILL BE ALLOCATED TO
THE CARMAX GROUP. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE CARMAX STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE PER SHARE WILL BE BETWEEN $15 AND $17. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
THE CARMAX STOCK IS COMMON STOCK OF THE COMPANY THAT IS INTENDED TO REFLECT
SEPARATELY THE PERFORMANCE OF THE USED- AND NEW-CAR RETAIL BUSINESS
CONSTITUTING THE CARMAX GROUP OF THE COMPANY. A SECOND SERIES OF COMMON STOCK
OF THE COMPANY, THE CIRCUIT CITY STOCK, IS INTENDED TO REFLECT SEPARATELY
THE PERFORMANCE OF THE CONSUMER ELECTRONICS AND APPLIANCE RETAIL BUSINESS
CONSTITUTING THE COMPANY'S CIRCUIT CITY GROUP, INCLUDING THE CIRCUIT CITY
GROUP'S INTEREST IN THE CARMAX GROUP. HOLDERS OF CARMAX STOCK AND
CIRCUIT CITY STOCK ARE ALL HOLDERS OF COMMON STOCK 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 CIRCUIT CITY STOCK IS NOT BEING OFFERED FOR SALE BY
THIS PROSPECTUS.
DIVIDENDS ON THE CARMAX STOCK WILL BE PAID AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY OUT OF THE LESSER OF (I) THE ASSETS OF THE COMPANY
LEGALLY AVAILABLE FOR THE PAYMENT OF DIVIDENDS AND (II) THE CARMAX GROUP
AVAILABLE DIVIDEND AMOUNT. THE COMPANY CURRENTLY DOES NOT INTEND TO PAY
DIVIDENDS ON THE CARMAX STOCK. THE VOTING POWER OF ONE SHARE OF CARMAX
STOCK RELATIVE TO ONE SHARE OF CIRCUIT CITY STOCK WILL FLUCTUATE BASED
UPON THE TIME-WEIGHTED RELATIVE MARKET VALUES THEREOF.
SUBJECT TO CERTAIN CONDITIONS, THE CARMAX STOCK MAY BE REDEEMED, AT THE
COMPANY'S OPTION, FOR SHARES OF ONE OR MORE WHOLLY-OWNED SUBSIDIARIES OF THE
COMPANY TO WHICH THE ASSETS AND LIABILITIES OF THE CARMAX GROUP HAVE BEEN
TRANSFERRED. IN THE EVENT OF A DISPOSITION BY THE COMPANY OF ALL OR
SUBSTANTIALLY ALL OF THE PROPERTIES AND ASSETS OF THE CARMAX GROUP, THE COMPANY
WILL, SUBJECT TO CERTAIN CONDITIONS AND LIMITATIONS, BE REQUIRED TO (I) PAY A
DIVIDEND ON OR REDEEM SHARES OF CARMAX STOCK IN AN AMOUNT EQUAL TO THE PRODUCT
OF THE OUTSTANDING CARMAX FRACTION, MULTIPLIED BY THE NET PROCEEDS OF SUCH
DISPOSITION OR (II) CONVERT EACH OUTSTANDING SHARE OF CARMAX STOCK INTO A NUMBER
OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 110% OF THE RATIO OF THE AVERAGE MARKET
VALUE OF ONE SHARE OF CARMAX STOCK TO THE AVERAGE MARKET VALUE OF ONE SHARE OF
CIRCUIT CITY STOCK. THE COMPANY MAY, AT ANY TIME, CONVERT EACH SHARE OF CARMAX
STOCK INTO A NUMBER OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 115% OF THE RATIO
OF THE TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CARMAX STOCK TO THE
TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CIRCUIT CITY STOCK. IN THE
EVENT OF THE LIQUIDATION OF THE COMPANY, THE RIGHTS OF THE HOLDERS OF THE CARMAX
STOCK AND THE CIRCUIT CITY STOCK WILL BE FIXED ON A PER SHARE BASIS IN
PROPORTION TO THEIR RESPECTIVE LIQUIDATION UNITS, WITH EACH SHARE OF CARMAX
STOCK HAVING .5 OF A LIQUIDATION UNIT, AND EACH SHARE OF CIRCUIT CITY STOCK
HAVING ONE LIQUIDATION UNIT.
THE FEATURES OF THE CARMAX STOCK AND THE CIRCUIT CITY STOCK ARE MORE FULLY
DISCUSSED UNDER "SUMMARY -- THE CARMAX STOCK" AND "DESCRIPTION OF CAPITAL STOCK"
IN THIS PROSPECTUS. ------------------------
THE CARMAX STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "KMX",
SUBJECT TO OFFICAL NOTICE OF ISSUANCE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------ ------------------------ ------------------------
PER SHARE........................................... $ $ $
TOTAL(3)............................................ $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$1,060,910.
(3) THE COMPANY HAS GRANTED TO THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF TO PURCHASE UP TO AN AGGREGATE OF
2,829,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS,
IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE
TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND
PROCEEDS TO COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES OF CARMAX STOCK ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND
IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SIMPSON THACHER & BARTLETT, COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT FEBRUARY , 1997
AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST
PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
GOLDMAN, SACHS & CO.
WHEAT FIRST BUTCHER SINGER
, 1997
<PAGE>
Inside Front Cover: Description of photographs:
[PHOTO]
Photograph of CarMax sign in front of CarMax site with caption reading
"The New Way to Buy Use Cars(Register Mark)."
Inside Flap Foldout: Description of photographs:
(Left to Right)
[PHOTO]
1. Photograph of customers shopping at CarMax site with inset of CarMax logo
[PHOTO]
2. List of advantages of shopping at CarMax
[PHOTO]
3. Caption reading "CarMax(Register Mark). Revolutionizing the Car Business(SM)"
[PHOTO]
4. Foldout includes seven insets of smaller photographs of various settings
at CarMax site
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF THE CARMAX STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. NO ACTION HAS BEEN OR WILL BE
TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT
A PUBLIC OFFERING OF THE SHARES OF THE CARMAX STOCK OR POSSESSION OR
DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT
PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE
POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO
THE OFFERING OF THE SHARES OF CARMAX STOCK AND THE DISTRIBUTION OF THIS
PROSPECTUS.
All references to "dollars" or "$" are to U.S. dollars.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................................ 3
SUMMARY................................................................................................................ 4
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS.............................................................. 14
RISK FACTORS........................................................................................................... 14
USE OF PROCEEDS........................................................................................................ 24
DIVIDEND POLICY........................................................................................................ 24
CAPITALIZATION......................................................................................................... 25
DILUTION............................................................................................................... 26
BUSINESS OF THE CARMAX GROUP........................................................................................... 27
MANAGEMENT OF THE CARMAX GROUP......................................................................................... 41
CARMAX GROUP SELECTED HISTORICAL FINANCIAL DATA........................................................................ 42
CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION..................... 43
CERTAIN MANAGEMENT AND ALLOCATION POLICIES............................................................................. 47
COMPANY SELECTED HISTORICAL FINANCIAL DATA............................................................................. 49
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.......................... 50
DESCRIPTION OF CAPITAL STOCK........................................................................................... 58
CERTAIN UNITED STATES TAX CONSEQUENCES................................................................................. 78
UNDERWRITERS........................................................................................................... 80
LEGAL MATTERS.......................................................................................................... 82
EXPERTS................................................................................................................ 82
AVAILABLE INFORMATION.................................................................................................. 83
GLOSSARY OF DEFINED TERMS.............................................................................................. 84
ILLUSTRATIONS OF CERTAIN TERMS......................................................................................... I-1
CARMAX GROUP FINANCIAL STATEMENTS...................................................................................... F-1
COMPANY FINANCIAL STATEMENTS........................................................................................... F-21
</TABLE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CARMAX STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") by the Company are hereby incorporated by reference into this
Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
February 29, 1996;
(b) all other reports filed with the Commission pursuant to Section 13(a)
or 15(d) since February 29, 1996, including the Quarterly Reports on
Form 10-Q for the fiscal quarters ended May 31, 1996, August 31, 1996
and November 30, 1996 and the Company's Current Reports on Form 8-K
filed with the Commission on March 8, 1996 and November 1, 1996;
(c) the Company's Proxy Statement filed with the Commission on December 24,
1996, but only as to Annexes V, VI and VII;
(d) the description of the Company's Common Stock contained in the
Registration Statement on Form 8-A filed with the Commission on January
2, 1997 (File No. 1-5767); and
(e) the description of the Rights to Purchase Preferred Stock, Series E and
the Rights to Purchase Preferred Stock, Series F contained in the
Registration Statement on Form 8-A filed with the Commission on January
2, 1997 (File No. 1-5767).
All documents filed by the Company, pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of the
offering of the CarMax Stock shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the respective dates of filing
of such documents. Any statement contained herein or in a document all or any
portion of which is incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such earlier statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to any person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all of the foregoing documents
incorporated herein by reference (other than certain exhibits to such
documents). Requests for such copies should be directed to Corporate Secretary,
Circuit City Stores, Inc., 9950 Mayland Drive, Richmond, Virginia 23233
(telephone number (804) 527-4022).
3
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS. AS USED
HEREIN, (I) THE "COMPANY" AND "CIRCUIT CITY" MEAN CIRCUIT CITY STORES, INC. AND
ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT OTHERWISE REQUIRES,
(II)"CARMAX" MEANS THE CARMAX GROUP, (III)"CARMAX STOCK" MEANS THE CIRCUIT CITY
STORES, INC. -- CARMAX GROUP COMMON STOCK, PAR VALUE $.50 PER SHARE, AND
(IV)"CIRCUIT CITY STOCK" MEANS THE CIRCUIT CITY STORES, INC. -- CIRCUIT CITY
GROUP COMMON STOCK, PAR VALUE $.50 PER SHARE. UNLESS INDICATED OTHERWISE, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES (I) AN INITIAL PUBLIC OFFERING
PRICE OF $16 PER SHARE (THE MIDPOINT OF THE RANGE SET FORTH ON THE COVER OF THIS
PROSPECTUS); (II) THAT THE U.S. UNDERWRITERS DO NOT EXERCISE THEIR
OVER-ALLOTMENT OPTION; (III) THE EFFECTIVENESS OF THE ACTIONS TAKEN AT THE
MEETING OF THE COMPANY'S SHAREHOLDERS HELD ON JANUARY 24, 1997 (THE "MEETING")
TO APPROVE (A) THE CARMAX STOCK PROPOSAL, (B) AN AMENDMENT TO THE COMPANY'S
AMENDED AND RESTATED ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF SHARES
OF THE COMPANY'S COMMON STOCK AUTHORIZED FOR ISSUANCE FROM 250,000,000 TO
350,000,000 AND (C) THE AMENDMENTS TO THE COMPANY'S 1994 STOCK INCENTIVE PLAN
(THE "STOCK INCENTIVE PLAN") TO RESERVE 5,700,000 SHARES OF CARMAX STOCK FOR
ISSUANCE UNDER THE STOCK INCENTIVE PLAN AND TO PERMIT THE CONVERSION OF
PREVIOUSLY OUTSTANDING OPTIONS TO ACQUIRE SHARES OF ONE OF THE COMPANY'S
SUBSIDIARIES (WHICH OUTSTANDING OPTIONS ARE HELD BY EMPLOYEES OF THE CARMAX
GROUP) INTO OPTIONS GRANTED UNDER THE STOCK INCENTIVE PLAN TO ACQUIRE SHARES OF
CARMAX STOCK (THE "CARMAX STOCK OPTIONS"); AND (IV) ALL SUCH PREVIOUSLY
OUTSTANDING OPTIONS HAVE BEEN SO CONVERTED INTO THE CARMAX STOCK OPTIONS. THE
FISCAL YEAR OF THE COMPANY ENDS ON THE LAST DAY OF FEBRUARY. UNLESS OTHERWISE
DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE RESPECTIVE
MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROSPECTUS. SEE "GLOSSARY OF DEFINED
TERMS."
CARMAX GROUP
OVERVIEW
CarMax is a leading retailer of used cars and light trucks in the United
States with six stores located in the Southeast and one vehicle reconditioning
center in Orlando, Florida. CarMax purchases, reconditions and sells used
vehicles at each of its stores and sells new vehicles at one of its Atlanta,
Georgia locations under a franchise agreement with Chrysler Corporation
("Chrysler"). CarMax provides its customers with a full range of related
services, including the financing of vehicle purchases through its own financing
unit, First North American Credit Corporation ("FNAC"), and through third
parties, and the sale of service policies. Since opening the first store in
Richmond, Virginia in October 1993, CarMax's retail operations have grown
rapidly, with total revenues of $77 million during the first full fiscal year
and $375 million for the nine months ended November 30, 1996. CarMax has
launched an aggressive, six-year rollout plan under which it plans to open one
additional store in Tampa, Florida by the end of fiscal 1997, eight to 10 stores
in fiscal 1998 and 15 to 20 stores each year thereafter through fiscal 2002.
CarMax was established in 1993 by the Company, a leading U.S. consumer
electronics retailer, to revolutionize the highly fragmented used-vehicle retail
market which was estimated at $294 billion in 1995. CarMax was created as a
result of the Company's desire to sustain the Company's growth beyond the end of
the decade. CarMax was the first used-vehicle retailer to offer a large
selection of quality used vehicles at low, fixed prices using a
customer-friendly sales process in an attractive, modern sales facility. CarMax
has designed a strategy to better serve this market by addressing the major
sources of dissatisfaction with traditional used-car retailing and to maximize
operating efficiencies with sophisticated systems and standardized operating
procedures and store formats. The Circuit City Group's focus on customer
satisfaction and operating efficiency has enabled it to become one of the
largest and most profitable consumer electronics companies in the United States,
with an ongoing and highly successful nationwide rollout of over 400 stores and
a 10-year compound annual growth rate in sales and earnings of 26 percent and 27
percent, respectively, for the period ended February 29, 1996. During the past
three years CarMax has leveraged, and continues to leverage, Circuit City's
operational expertise, innovative systems and resources to refine the
used-vehicle retailing concept, to develop store prototypes and proprietary
systems and to implement effective financial and operational controls that now
enable CarMax to embark on an aggressive, nationwide rollout. In addition,
CarMax currently intends to add new-car franchises to some of its existing and
new locations as it grows and to expand its retail repair service operations
commencing in fiscal 1998.
Automotive retailing, with more than $596 billion in 1995 sales, is the
largest consumer retail market in the United States, representing nearly 8
percent of the U.S. gross domestic product. Used-vehicle sales in 1995 were
estimated at $294 billion, with approximately $232 billion in sales by
franchised and independent dealers and the balance in privately negotiated
transactions. CarMax believes that conditions in the used-vehicle retail market,
coupled with its operating and growth strategies, provide CarMax with an
opportunity for substantial growth.
4
<PAGE>
OPERATING STRATEGIES
CarMax has pioneered and implemented operating strategies that enhance
customer satisfaction and loyalty and maximize operating efficiency. Since
opening its first store in Richmond, Virginia in October 1993, CarMax has
successfully implemented its operating model at five additional stores.
Excluding the Orlando, Florida store which opened November 6, 1996, each CarMax
store is profitable on a store-level basis, including profits from vehicle
financing but before the allocation of Group overhead expenses.
LOW, FIXED "NO-HAGGLE" PRICES
CarMax has implemented an every-day low price strategy under which it sets
fixed, "no-haggle" prices on its used and new vehicles. Most prices are at or
below the best negotiated price in the market. Used vehicles at CarMax are
generally priced from $500 to $1,000 below National Automobile Dealers
Association ("NADA") average book value. Prices on all vehicles are clearly
displayed on each vehicle's price and information sticker and in CarMax
newspaper advertising.
BROAD SELECTION OF HIGH-QUALITY VEHICLES
Each CarMax store features a broad selection of quality used cars and light
trucks with a wide range of prices appealing to a wide range of potential
customers. CarMax stores vary in inventory size from 400 to 1,200 vehicles
depending on local market size and consumer demand. To appeal to the vast array
of consumer preferences and budgets, CarMax offers its used vehicles under two
programs -- the CarMax program and the ValuMax program. CarMax vehicles
generally are one to five years old, with less than 70,000 miles, and most are
priced from $9,500 to $21,000. Through the ValuMax program, CarMax sells
high-quality used vehicles that generally are more than five years old and/or
have over 70,000 miles, with most priced in a range from $4,500 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 and a free, 30-day comprehensive warranty on each vehicle.
EFFICIENT, CUSTOMER-FRIENDLY SALES PROCESS
CarMax has developed a streamlined, innovative sales process that redefines
the way consumers buy vehicles. CarMax believes that the major causes of
consumer dissatisfaction with the traditional car-buying experience include: (i)
dealers' attempts to combine the vehicle purchase transaction with the trade-in
transaction and the sale of related products; (ii) the confrontational
negotiations between the customer and the dealer; (iii) the difficulty the
customer experiences in obtaining sufficient information to make informed
decisions; (iv) interaction with multiple personnel at different stages of the
buying process; and (v) the hidden costs and inflated prices embedded in the
sales process. By contrast, the CarMax process enables customers to separately
evaluate each step of the sales process described below and to make informed
decisions at each step based on complete information about their options and
associated prices. To increase efficiency, the customer is assisted throughout
the CarMax sales process by the same sales consultant and by AutoMation, the
customer-friendly, point-of-sale system that is proprietary to CarMax.
(Bullet) SELECTION AND PRICE. Customers can use AutoMation to
electronically search an entire store's inventory for vehicles that meet
their model and feature requirements and price range. AutoMation displays a
color picture of each vehicle and optionally generates a vehicle
information sheet with the vehicle price and selected features for the
customer's reference and a map directing the customer to the vehicle's
location on the lot. Prices are clearly displayed, along with selected
vehicle features, on each vehicle's price and information window sticker.
The CarMax low, "no-haggle" price policy assures all customers the same low
price and avoids confrontational price negotiations with customers.
(Bullet) TRADE-INS. CarMax has replaced the traditional "trade-in"
transaction with a process in which trained CarMax buyers appraise any
vehicle, usually in 30 minutes or less, and provide the vehicle's owner
with a written guaranteed cash offer that is good for seven days or 250
miles. The appraisal process is available to everyone, whether or not they
are purchasing a vehicle from CarMax. In contrast to the approach of
traditional dealers who seek to combine the vehicle purchase and trade-in
transactions, the CarMax sales process enables the customer to separately
evaluate and make an informed decision with respect to each transaction.
(Bullet) FINANCING. The sales consultant uses AutoMation to
electronically submit financing applications and receive responses from
multiple lenders, generally in less than eight minutes. Customers are then
able to review online with the sales consultant financing options and terms
from each prime financing source that CarMax uses, including the amount
5
<PAGE>
financed, interest rate, term and monthly payment. CarMax believes that, by
contrast, traditional dealers frequently offer inflated financing terms to
customers and do not clearly separate the components of the financing
transaction.
(Bullet) SERVICE POLICIES. CarMax offers primary and extended service
policies that have been custom-designed to its own specifications. CarMax
believes that superior coverage and low, fixed prices distinguish its
service policies from those of its competitors. Through AutoMation, the
customer can review online with the sales consultant all available service
policy options and costs and make an informed, unpressured decision. In
contrast, at many traditional dealerships customers may feel pressured into
buying service policies they do not want at inflated prices.
(Bullet) FEES AND OPTIONS. CarMax does not charge processing,
administration, application or other "hidden" fees (as much as $400 at many
traditional auto dealers) and does not attempt to sell other options at
inflated prices. CarMax charges only state-required fees that are clearly
displayed on the vehicles and in the AutoMation system.
SOPHISTICATED INVENTORY MANAGEMENT SYSTEMS AND CONTROLS
Through its inventory management systems and controls, CarMax minimizes
inventory carrying costs. AutoMation, the central feature of the CarMax
inventory management and control system, enables each vehicle to be tracked
throughout the sales process. Using the information provided by AutoMation, and
applying sophisticated statistical modeling techniques, CarMax is able to
optimize its inventory mix and display by store, anticipate future inventory
needs at each store, evaluate sales consultant performance and refine its
vehicle pricing strategy. CarMax maintains strict inventory aging policies under
which it disposes of any vehicle that has not been sold at retail within
specified periods. Less than one percent of CarMax's retail inventory is
ultimately sold at wholesale.
INCREASED EFFICIENCY THROUGH STANDARDIZATION AND IMPLEMENTATION OF "BEST
PRACTICES"
Since opening its first store in 1993, CarMax has acquired significant
knowledge and experience in operating used-vehicle stores and continually
refines its selling and operating procedures and store prototypes in order to
improve operating efficiency and customer service. As a result of this
experience, CarMax has adopted and implemented the "best practices" throughout
all of its stores by standardizing the most efficient and optimal processes.
CarMax believes that standardization of best practices will enable it to become
a low-cost operator within its industry.
ATTRACTIVE, EFFICIENT STORE PROTOTYPES
The CarMax store format provides an open and attractive physical
environment that CarMax believes enhances its customer-friendly and efficient
sales process and creates a unique shopping experience. The stores are currently
built in three different prototypes, with inventory capacity ranging from 400 to
1,200 cars, depending upon local market size and consumer demand. CarMax has
successfully implemented each of these prototypes.
GROWTH STRATEGIES
CarMax believes its operating strategies and the extensive experience of
its senior management team will enable it to capitalize on the significant
opportunities available in the large, highly-fragmented automotive retailing
industry. CarMax intends to aggressively grow its business through (i) a rapid
rollout of used-vehicle stores; (ii) the expansion of retail repair service
operations; and (iii) the addition of selected new-vehicle franchises.
RAPID ROLLOUT OF USED-VEHICLE STORES
CarMax has launched an aggressive, six-year rollout plan under which it
intends to reach a total store count of 80 to 90 locations by the end of fiscal
2002. CarMax already has under contract most of the sites that it plans to open
in fiscal 1998. Under the rollout plan, CarMax expects that it will experience a
substantial increase both in overall square footage and in display capacity,
with square footage increasing from 0.4 million square feet at the end of fiscal
1997 to between 4.6 and 5.9 million square feet at the end of fiscal 2002 and
display capacity increasing from 5,144 vehicles to between 51,000 and 66,000
vehicles over the same period. In addition to growth from the opening of new
stores, CarMax expects that it will realize significant sales growth from
comparable store sales increases as newly opened stores mature. CarMax believes,
based on its experience to date, that each store will reach its planned mature
sales and earnings potential by the end of its fourth year. However, given the
infrequent repeat purchase cycle on vehicles, sales and earnings may continue to
grow beyond this initial ramp-up period.
6
<PAGE>
EXPANSION OF RETAIL REPAIR SERVICE OPERATIONS
CarMax plans to expand its retail repair service operations commencing in
fiscal 1998 in order to achieve greater future profitability, attract new
customers and further develop customer loyalty. Retail repair service operations
have historically been a substantial source of dealer profitability,
representing approximately 43 percent of dealers' 1995 profits according to the
NADA. Currently, CarMax uses its service facilities to inspect and recondition
used vehicles acquired for resale and to provide existing customers with limited
maintenance and light repair services. As part of the rollout of used-vehicle
stores, CarMax plans to open additional reconditioning centers that will perform
an increasing share of the inspection and reconditioning functions, thereby
freeing up repair facilities at the stores. Under the rollout plan, CarMax
anticipates that its total in-store service bays will increase from 194 expected
at the end of fiscal 1997 to 2,580 expected at the end of fiscal 2002 (based on
an average of the annual range for facilities planned to be opened through
fiscal 2002). CarMax is currently operating prototypes for this expanded service
at its Atlanta, Georgia retail locations and is developing systems and
procedures that are designed to offer the retail-repair customer an efficient,
customer-friendly process consistent with the process that CarMax has developed
for its vehicle sales operations.
ADDITION OF NEW-VEHICLE FRANCHISES
CarMax believes that new-vehicle operations present opportunities for
incremental revenues and operational and financial synergies when combined with
used-vehicle operations. CarMax currently operates a Chrysler franchise at one
of its Atlanta, Georgia locations. In less than five months of operation, that
franchise surpassed the annual planning volume established by Chrysler. Based on
its experience to date with the Atlanta location, CarMax believes the addition
of a new-vehicle franchise to a used-vehicle store should provide incremental
revenues and contribute to the store's operating profits (including profits from
vehicle financing but before the allocation of group overhead expenses) during
the first full year of franchise operation. CarMax intends to aggressively
pursue new-car franchises for its new and existing stores both through
acquisition of franchises within the territory of its store operations and
through new grants. CarMax plans to add more than 25 new car franchises to its
used-car operations over the initial phase of its rollout through fiscal 2002.
However, given the relative unavailability of new franchises and the limited
availability of franchises within a suitable radius of its existing and proposed
stores, as well as the uncertain future willingness of manufacturers to approve
these transactions, CarMax cannot assure that it will be able to achieve this
portion of its growth plan. CarMax has received initial indications from several
foreign and domestic manufacturers of their willingness to approve CarMax as a
franchisee. CarMax is continuing to explore opportunities with these
manufacturers, as well as with existing franchised dealerships.
SYNERGIES WITH CIRCUIT CITY GROUP
As CarMax continues its rollout of used-vehicle stores, it will continue to
benefit from being a part of the Company by leveraging the Company's financial
strength, operational expertise, innovative systems and resources. These
benefits will include (i) a lower cost of capital due to the Company's
creditworthiness; (ii) significant cost savings on advertising through joint
purchasing of media with the Circuit City Group, one of the top purchasers of
newspaper advertising and spot television advertising in the United States;
(iii) the ability to leverage the Company's resources by executing
sale-leaseback and securitization financing transactions, (iv) access to the
Circuit City Group's real estate expertise, including site selection and
facilities construction; (v) the Company's extensive experience in extending
consumer credit; and (vi) management expertise from a team that contributed to
the rapid growth and success of the Circuit City Group.
THE COMPANY
The Company is comprised of the CarMax Group and the Circuit City Group.
The Circuit City Group is the nation's largest retailer of brand-name consumer
electronics and major appliances and a leading retailer of personal computers
and music software. It sells video equipment, including televisions, digital
satellite systems, video cassette recorders and camcorders; audio equipment,
including home stereo systems, compact disc players, tape recorders and tape
players; mobile electronics, including car stereo systems and security systems;
home office products, including personal computers, peripheral equipment and
facsimile machines; other consumer electronics products, including cellular
phones, telephones and portable audio and video products; entertainment
software; and major appliances, including washers, dryers, refrigerators,
microwave ovens and ranges.
The Company was incorporated in 1949 and is a Virginia corporation. The
principal executive office of the Company is located at 9950 Mayland Drive,
Richmond, Virginia 23233; its telephone number is (804) 527-4000.
7
<PAGE>
THE CARMAX STOCK PROPOSAL
On January 24, 1997, the shareholders of the Company approved a
comprehensive plan (the "CarMax Stock Proposal") that will result in a
restructuring of the Company's existing common stock into two new series of
common stock intended to reflect separately the performance of the Company's two
main businesses -- the CarMax Group, which is engaged in the used- and new-car
retail business and the Circuit City Group, which is engaged in the consumer
electronics and appliances retail business. The Circuit City Group includes the
interest of the Circuit City Group in the CarMax Group. The key elements of the
CarMax Stock Proposal are as follows:
(Bullet) The CarMax Stock is being created as a new series of common stock
to reflect the performance of the CarMax Group.
(Bullet) The CarMax Stock offered to the public will initially represent
20% of the equity value of the CarMax Group without giving effect
to the CarMax Stock Options (22.3% of such equity value if the
U.S. Underwriters' over-allotment option is exercised in full).
Upon completion of the Offering, the Circuit City Group will hold
the balance of such equity value of the CarMax Group not sold in
the Offering. The net proceeds of the Offering will be allocated
to the CarMax Group and used to finance part of the Company's
expansion plans for the CarMax Group and to repay the CarMax
Group's allocated portion of Company indebtedness that was
incurred to finance CarMax's growth to date.
(Bullet) Each of the currently outstanding shares of the Company's existing
common stock is being redesignated (the "Common Stock
Redesignation") as a share of the Circuit City Stock, which is
intended to reflect separately the performance of the Circuit City
Group, including its Inter-Group Interest in the CarMax Group. See
"Description of Capital Stock -- Inter-Group Interest."
THE OFFERING
<TABLE>
<S> <C>
Shares of CarMax Stock offered by the Company:
U.S. Offering....................................... 15,088,000 shares
International Offering.............................. 3,772,000 shares
Total Offered and Outstanding (1).............. 18,860,000 shares
Use of Proceeds....................................... The net proceeds will be used to finance part of the Company's
expansion plans for the CarMax Group and to repay the CarMax Group's
allocated portion of Company indebtedness that was incurred to
finance CarMax's growth to date.
New York Stock Exchange Symbol........................ "KMX."
</TABLE>
- ---------------
(1) Does not include (i) 75,440,000 shares which is the Number of Shares
Issuable with Respect to the Inter-Group Interest, (ii) 5,700,000 shares
reserved for issuance under the Stock Incentive Plan, of which approximately
4,781,808 are subject to the CarMax Stock Options with an average weighted
exercise price of $.51 per share, and (iii) 2,829,000 shares issuable upon
exercise of the U.S. Underwriters' over-allotment option.
8
<PAGE>
THE CARMAX STOCK
<TABLE>
<S> <C>
DIVIDENDS............................................. The Company currently does not intend to pay dividends on the CarMax
Stock.
Dividends on the CarMax Stock will be paid at the discretion of the
Board of Directors based primarily upon the financial condition,
results of operations and business requirements of the CarMax Group
and the Company as a whole. Dividends will be payable out of the
lesser of (i) the assets of the Company legally available for the
payment of dividends and (ii) the CarMax Group Available Dividend
Amount.
VOTING RIGHTS......................................... Except as otherwise described herein, the holders of CarMax Stock and
Circuit City Stock will vote together as a single voting group. Each
share of Circuit City Stock will have one vote per share. Each share
of CarMax Stock will have a variable vote equal to the ratio of the
time-weighted average Market Value of one share of CarMax Stock to
the time-weighted average Market Value of one share of Circuit City
Stock, calculated over the 20-Trading Day period ending 10 Trading
Days prior to the applicable record date, and may have more than,
less than or exactly one vote per share.
RIGHTS ON DISPOSITION................................. If the Company disposes of all or substantially all of the properties
and assets attributed to the CarMax Group (I.E., 80% or more on a
current market value basis), other than in a transaction in which the
Company receives primarily equity securities of an entity engaged or
proposing to engage primarily in a business similar or complementary
to the business of the CarMax Group, the Company must either (i)
distribute to holders of CarMax Stock an amount in cash and/or
securities or other property equal to the product of the Outstanding
CarMax Fraction and the Fair Value of the Net Proceeds of such
disposition, either by special dividend or by redemption of all or
part of the outstanding shares of CarMax Stock, or (ii) convert each
share of CarMax Stock into a number of shares of Circuit City Stock
equal to 110% of the ratio of the average Market Value of one share
of CarMax Stock to the average Market Value of one share of Circuit
City Stock, calculated over the 10-Trading Day period beginning on
the 16th Trading Day after consummation of the disposition
transaction.
The Company may, at any time prior to the first anniversary of a
dividend on, or partial redemption of, shares of CarMax Stock
following a disposition of all or substantially all of the properties
and assets attributed to the CarMax Group, convert each remaining
outstanding share of CarMax Stock into a number of shares of Circuit
City Stock equal to 110% of the ratio of the time-weighted average
Market Value of one share of CarMax Stock to the time-weighted
average Market Value of one share of Circuit City Stock, calculated
over the 20-Trading Day period ending five Trading Days prior to the
date of notice to holders of such conversion.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
CONVERSION AT OPTION OF COMPANY....................... The Company may, at any time, convert each share of CarMax Stock into
a number of shares of Circuit City Stock equal to 115% of the ratio
of the time-weighted average Market Value of one share of CarMax
Stock to the time-weighted average Market Value of one share of
Circuit City Stock, calculated over the 20-Trading Day period ending
five Trading Days prior to the date of notice to holders of such
conversion.
REDEMPTION IN EXCHANGE FOR
STOCK OF SUBSIDIARY................................. The Company may redeem the CarMax Stock for a number of shares of one
or more wholly owned subsidiaries of the Company that hold all of the
assets and liabilities attributed to the CarMax Group equal to the
proportionate interest in the CarMax Group represented by the
outstanding CarMax Stock.
LIQUIDATION........................................... Holders of CarMax Stock and Circuit City Stock will be entitled to a
portion of the assets remaining for distribution to holders of Common
Stock on a per share basis in proportion to the respective per share
liquidation units of such series (each, a "Liquidation Unit"). Each
share of CarMax Stock will have .5 of a Liquidation Unit and each
share of Circuit City Stock will have one Liquidation Unit, subject
to adjustment if shares of either series are subdivided, combined or
distributed as a dividend.
CERTAIN PROVISIONS OF THE CIRCUIT CITY STOCK.......... If the Company disposes of all or substantially all of the properties
and assets attributed to the Circuit City Group, the Company must
either distribute the Fair Value of the Net Proceeds thereof to
holders of Circuit City Stock by special dividend or redemption or
convert the Circuit City Stock into CarMax Stock, upon terms and
conditions comparable to those described under " -- The CarMax
Stock-Rights on Disposition." The Company may, at any time, convert
the Circuit City Stock into CarMax Stock upon terms and conditions
comparable to those described under " -- The CarMax Stock-Conversion
at Option of Company." The Company may redeem the Circuit City Stock
for all of the shares of one or more wholly owned subsidiaries of the
Company that hold all of the assets and liabilities attributed to the
Circuit City Group, and if at such time the Circuit City Group holds
an Inter-Group Interest, the Company also will issue shares of CarMax
Stock in respect of the Inter-Group Interest either to the holders of
Circuit City Stock or to one or more of such subsidiaries.
</TABLE>
INTER-GROUP INTEREST
The Board of Directors has determined that 75,440,000 is the number of
shares of CarMax Stock that, if issued, would represent 100% of the equity value
of the CarMax Group prior to the Offering. The 18,860,000 shares of CarMax Stock
to be issued in the Offering will be issued for the account of the CarMax Group.
As a result, immediately after the Offering, the Outstanding CarMax Fraction
will equal 20% and the Inter-Group Interest Fraction will equal 80%, without
giving effect to the CarMax Stock Options. If the U.S. Underwriters exercise
their over-allotment option, the number of shares subject to such option also
will be issued for the account of the CarMax Group. If the over-allotment option
is exercised in full, the Outstanding CarMax Fraction will equal 22.3% and the
Inter-Group Interest Fraction will equal 77.7%, without giving effect to the
CarMax Stock Options. At the time of any additional issuance of CarMax Stock,
the Company will identify the number of shares issued for the account of the
Circuit City Group, if any, through a reduction in the Number of Shares Issuable
with Respect to the Inter-Group Interest, the net proceeds of which will be
allocated to the Circuit City Group, and the number of shares issued for the
account of the CarMax Group, if any, the net proceeds of which will be allocated
to the CarMax Group.
10
<PAGE>
The "Outstanding CarMax Fraction" means the percentage interest in the
CarMax Group represented at any time by the outstanding shares of CarMax Stock,
and the "Inter-Group Interest Fraction" means the remaining percentage interest
in the CarMax Group that is attributed to the Circuit City Group.
For further discussion of the Inter-Group Interest, see "Description of
Capital Stock -- Inter-Group Interest" and Annex I hereto.
RISK FACTORS
When evaluating the CarMax Stock, prospective investors should be aware of
certain risk factors relating to the business of the CarMax Group and to the
CarMax Stock. With respect to the business of the CarMax Group, such risk
factors include: (i) CarMax's limited operating history and history of losses;
(ii) the risks associated with expansion; (iii) the highly competitive nature of
the automotive retail industry; (iv) the need for substantial additional capital
to fund planned expansion; (v) the sufficiency of sources of used vehicles to
meet current needs and to support planned expansion; (vi) dependence on and
availability of key personnel; (vii) uncertainty regarding the expansion of
retail repair service operations; (viii) the limited availability of, and
manufacturer control over, existing and new franchises for the sale of new
vehicles; (ix) the cyclicality and seasonality of automobile sales; (x) the
effects of any decline in the quality of the CarMax Group's installment sales
contract portfolio; (xi) certain legal proceedings; and (xii) the effect of
environmental and other governmental regulations.
With respect to the CarMax Stock, such risk factors include: (i) the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities; (ii) limited separate shareholders' rights with respect to the
two series of Common Stock; (iii) the lack of legal precedent with respect to
the fiduciary duties of the board of directors of a company with two series of
common stock, the rights of which are defined by specified operations of the
company; (iv) the potential diverging interests of two series of common stock;
(v) the ability of the Board of Directors to change management and allocation
policies without shareholder approval; (vi) the ability to transfer funds
between the Groups; (vii) the effect of allocating financing costs between the
Groups; (viii) the potential effects of a possible disposition of assets
attributed to the CarMax Group; (ix) the Company's ability to issue authorized
but unissued shares of CarMax Stock without shareholder approval; (x)
limitations on potential unsolicited acquisitions of the CarMax Group; and (xi)
the absence of a prior market for the CarMax Stock and the possible volatility
of the price of the CarMax Stock following the Offering.
For additional information with respect to the foregoing considerations,
see "Risk Factors."
USE OF SERVICE MARKS
The mark "Circuit City" used herein is a federally registered service mark
of the Circuit City Group and the marks "CarMax," "MaxCare," "ValuMax" and
"AutoMation" used herein are federally registered service marks of the CarMax
Group.
11
<PAGE>
CARMAX GROUP
SUMMARY PRO FORMA AND HISTORICAL FINANCIAL DATA
The summary historical financial data presented below as of November 30,
1996, and for the nine months ended November 30, 1996 and 1995, were derived
from the CarMax Group's unaudited interim Financial Statements set forth herein,
which include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary to present fairly such data for an interim period.
Interim operating results are not necessarily indicative of the results that may
be expected for a full year. The summary historical financial data presented
below as of February 29, 1996, and for each of the years in the three-year
period ended February 29, 1996, were derived from the CarMax Group's Financial
Statements set forth herein. The unaudited pro forma results of operations for
the nine months ended November 30, 1996, and the fiscal year ended February 29,
1996, give effect to the Offering at an assumed public offering price of $16 per
share (and assuming that the underwriters do not exercise any over-allotment
option) and the application of a portion of the net proceeds to repay the CarMax
Group's allocated portion of Company indebtedness as described under "Use of
Proceeds" as if they had occurred on March 1, 1995. The unaudited balance sheet,
as adjusted, as of November 30, 1996, gives effect to the pro forma transactions
and events described above, as if they had occurred on November 30, 1996. The
summary financial data should be read in conjunction with the CarMax Group's
Financial Statements, the CarMax Group's unaudited interim Financial Statements
and the information in "CarMax Management's Discussion and Analysis of Results
of Operations and Financial Condition" set forth herein, as well as the
Company's Consolidated Financial Statements, the Company's unaudited interim
Consolidated Financial Statements, and the information in "Company Management's
Discussion and Analysis of Results of Operations and Financial Condition" set
forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
----------------- ------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
Net sales and operating revenues...................... $375 $203 $276 $ 77 $ 16
Cost of sales......................................... 344 186 252 72 14
---- ---- ---- ---- ----
Gross profit....................................... 31 17 24 5 2
---- ---- ---- ---- ----
Selling, general and administrative expenses.......... 35 21 29 11 5
Interest expense...................................... 4 3 4 1 --
---- ---- ---- ---- ----
Total expenses........................................ 39 24 33 12 5
---- ---- ---- ---- ----
Loss before income tax benefit..................... 8 7 9 7 3
Income tax benefit.................................... 3 3 4 3 1
---- ---- ---- ---- ----
Net loss........................................... $ 5 $ 4 $ 5 $ 4 $ 2
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
PRO FORMA RESULTS OF OPERATIONS (a)
Interest expense...................................... $ -- $ --
---- ----
Total expenses........................................ 35 29
---- ----
Loss before income tax benefit..................... 4 5
Income tax benefit.................................... 2 2
---- ----
Net loss........................................... $ 2 $ 3
---- ----
---- ----
Net loss attributable to CarMax Stock (b).......... $ .4 $ .6
---- ----
---- ----
Weighted average shares outstanding (c)............ 23 23
---- ----
---- ----
Net loss per share (b)............................. $.02 $.03
---- ----
---- ----
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 30, 1996 FEBRUARY 29, 1996
------------------------- -----------------
AS ADJUSTED (A) ACTUAL ACTUAL
--------------- ------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Working capital.......................................... $ 195 $(18) $ 47
Total assets............................................. 297 184 103
Total debt............................................... -- 172 97
Accumulated group equity (deficit)....................... 269 (16) (11)
</TABLE>
- ---------------
(a) Reflects the consummation of the Offering and the application of a portion
of the net proceeds to repay the CarMax Group's allocated portion of Company
indebtedness. Proceeds not used to repay such indebtedness may be invested
temporarily in an interest-bearing loan to the Circuit City Group. See "Use
of Proceeds" and "Capitalization."
(b) The net loss attributable to CarMax Stock is equal to the product of (i) the
net loss and (ii) the Outstanding CarMax Fraction. Net loss per share is
computed by dividing the net loss attributable to CarMax Stock by the
weighted average shares outstanding of CarMax Stock.
(c) The weighted average shares outstanding assumes that (i) 18,860,000 shares
of CarMax Stock have been outstanding for the period presented and (ii)
4,629,051 shares of CarMax Stock underlying the CarMax Stock Options are
outstanding utilizing the treasury stock method assuming that the initial
public offering price is $16 per share.
12
<PAGE>
THE COMPANY
SUMMARY PRO FORMA AND HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary consolidated historical financial data presented below as of
November 30, 1996, and for the nine months ended November 30, 1996 and 1995 were
derived from the Company's unaudited interim Consolidated Financial Statements
set forth herein, which include all adjustments, consisting of normal recurring
accruals, that the Company considers necessary to present fairly such data for
an interim period. Interim operating results are not necessarily indicative of
the results that may be expected for a full year. The summary consolidated
historical financial data presented below as of February 29, 1996, and for each
of the years in the five-year period ended February 29, 1996, were derived from
the Company's Consolidated Financial Statements set forth herein. The unaudited
pro forma balance sheet presented below as of November 30, 1996, gives effect to
the Offering at an assumed public offering price of $16 per share (and assuming
that the underwriters do not exercise any over-allotment option) and the
application of a portion of the net proceeds to repay the CarMax Group's
allocated portion of Company indebtedness, as if they had occurred on November
30, 1996. The summary consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements, the Company's unaudited
interim Consolidated Financial Statements, and the information in "Company
Management's Discussion and Analysis of Results of Operations and Financial
Condition" set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
----------------- ----------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net sales and operating revenues...................... $5,246 $4,776 $7,029 $5,583 $4,131 $3,270 $2,790
Cost of sales, buying and warehousing................. 4,065 3,683 5,394 4,198 3,025 2,346 1,981
------ ------ ------ ------ ------ ------ ------
Gross profit....................................... 1,181 1,093 1,635 1,385 1,106 924 809
------ ------ ------ ------ ------ ------ ------
Selling, general and administrative expenses.......... 1,051 921 1,323 1,106 892 745 676
Interest expense...................................... 20 17 25 10 5 4 9
------ ------ ------ ------ ------ ------ ------
Total expenses........................................ 1,071 938 1,348 1,116 897 749 685
------ ------ ------ ------ ------ ------ ------
Earnings before income taxes....................... 110 155 287 269 209 175 124
Provision for income taxes............................ 42 58 108 101 77 65 46
------ ------ ------ ------ ------ ------ ------
Net earnings....................................... $ 68 $ 97 $ 179 $ 168 $ 132 $ 110 $ 78
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER 30, 1996 FEBRUARY 29, 1996
------------------------- -----------------
AS ADJUSTED (A) ACTUAL ACTUAL
--------------- ------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Working capital....................................... $ 1,049 $ 836 $ 905
Total assets.......................................... 3,447 3,334 2,526
Total debt............................................ 853 1,025 493
Total stockholders' equity............................ 1,417 1,132 1,064
</TABLE>
- ---------------
(a) Reflects the consummation of the Offering and the application of a portion
of the net proceeds to repay the CarMax Group's allocated portion of Company
indebtedness.
13
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under the captions "Summary," "Business of the
CarMax Group," "CarMax Group Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Company Management's Discussion and
Analysis of Results of Operations and Financial Condition" or incorporated by
reference herein from Annexes V, VI and VII to the Company's Proxy Statement
filed with the Commission on December 24, 1996, including statements regarding
the CarMax Group's growth strategy and the implementation of its expansion plan,
CarMax's ability to fund such expansion plan, the projected growth and results
of operations of the CarMax Group's business and the factors contributing
thereto, the Circuit City Group's Superstore expansion plans, the Company's
growth projections and the Company's liquidity needs, and other statements
contained herein regarding matters that are not historical facts, are
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Risk Factors" and in the Company's 1996 Annual Report on Form 10-K,
incorporated by reference herein.
RISK FACTORS
INVESTMENT IN THE CARMAX STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS. IN
ADDITION TO THE OTHER INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD GIVE CAREFUL CONSIDERATION TO THE FOLLOWING FACTORS
BEFORE PURCHASING SHARES OF THE CARMAX STOCK OFFERED HEREBY.
FACTORS RELATING TO THE CARMAX BUSINESS
LIMITED OPERATING HISTORY; HISTORY OF NET LOSSES; STORE MATURITY
CarMax opened its first store location in Richmond, Virginia in October
1993 and now operates six stores and one reconditioning center. Excluding its
Orlando, Florida store which opened November 6, 1996, each CarMax store is
profitable on a store-level basis including profits from vehicle financing but
before the allocation of Group overhead expenses. Net losses for the CarMax
Group were $1.8 million, $4.1 million and $5.2 million in fiscal 1994, 1995 and
1996, respectively, and $3.9 million and $4.5 million for the three and nine
months ended November 30, 1996, respectively. CarMax expects to produce a
greater loss in fiscal 1997 compared to fiscal 1996 due to the increased Group
overhead and other infrastructure costs to support its accelerated rollout plan
and costs of enhancements to existing locations. The loss for the fourth quarter
of fiscal 1997 is expected to be similar to that of the third quarter of fiscal
1997. CarMax believes, based on current trends, that each store will reach its
planned mature sales and earnings potential by the end of its fourth year;
however, because none of the CarMax stores has been open for four years, there
can be no assurance the period to store maturity will not be longer or shorter
than four years.
RISKS ASSOCIATED WITH EXPANSION
The CarMax growth strategy calls for aggressive expansion of its store
base. By the end of fiscal 2002, CarMax expects to be operating 80 to 90 stores
in 45 of the nation's top 50 markets. CarMax's ability to implement this growth
strategy, and to do so profitably, will depend on many factors, including those
discussed under " -- Highly Competitive Industry; New Entrants;" " -- Need for
Substantial Additional Capital;" " -- Sourcing of Used Cars;" " -- Dependence
Upon and Availability of Key Personnel;" " -- Uncertainty Regarding Expansion of
Retail Repair Service Operations;" " -- Manufacturer Control Over Existing and
New Franchises; Franchising Agreement with Chrysler;" and " -- Cyclicality of
Automobile Sales; Geographic Concentration." Additional factors include CarMax's
ability to (i) obtain suitable sites for new stores at a reasonable cost, (ii)
adapt and enhance its management systems and controls to support the expanded
operations and (iii) expand its operations, including used- and new-vehicle
sales, so as to generate additional revenues without proportionately increasing
Group overhead. In addition, unforeseen expenses and delays associated with a
rapid rollout of new stores and retail services may be encountered that could
have a material adverse effect on the business, results of operations and
financial condition of CarMax and its planned expansion.
HIGHLY COMPETITIVE INDUSTRY; NEW ENTRANTS
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 has also attracted attention recently from a
number of companies, some with substantial resources, that have entered, or have
announced plans to enter,
14
<PAGE>
this market through a national or regional network of used-vehicle stores. Many
franchised new-car dealerships have also increased their focus on the
used-vehicle market. CarMax believes that these companies and dealerships are
attracted by the potential for generating high sales volume per location, the
relatively high gross margins that currently exist in this market and the
industry's fragmentation and potential for consolidation. Part of CarMax's
business strategy is to position itself as the low-price, low-cost operator in
the industry. However, increased competition in this industry, particularly from
new entrants adopting non-traditional selling methods similar to those used by
CarMax, could result in, among other things, increased wholesale costs for used
cars and lower retail sales prices and margins than expected, which could
adversely affect the business, results of operations and financial condition of
CarMax.
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. CarMax could therefore face even greater competition at its
existing and any future new-vehicle franchise locations if the manufacturers
awarding such franchises award additional dealership franchises to others in the
same market areas.
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.
CarMax's inventory includes a significant percentage of late model vehicles
which would be particularly affected by such discounting. Therefore, aggressive
or prolonged discounting by manufacturers may have a material adverse effect on
CarMax's results of operations for the periods in which such discounting occur.
NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL
CarMax will require substantial additional capital in order to fund its
planned rollout of stores. If adequate funds are not available, CarMax may be
required to significantly curtail its expansion plans. The Group has funded most
of its capital expenditures for the opening of new stores through Company debt
allocated to the CarMax Group and sale-leaseback transactions and sells most of
its installment loan receivables generated by FNAC through its auto loan
securitization program. CarMax's ability to fund the planned expansion of its
store base and installment loan portfolio is directly related to the continued
availability of these funding sources. CarMax is also working to obtain cost
effective securitization of automobile inventory; however, there can be no
assurance that it will be able to do so. CarMax's ability to continue to
undertake both sale-leaseback and securitization transactions, and to do so on
economically favorable terms, depends in large part on the existence of
available financing capacity of the Company. There can be no assurance that the
Company will continue to have capacity available or, if it does, that it would
be made available to the CarMax Group. Decisions relating to the allocation of
available financing capacity between the CarMax Group and the Circuit City Group
would be made by the Board of Directors in its good faith business judgment or
in accordance with procedures and policies adopted by the Board of Directors
from time to time. See " -- Factors Relating to the CarMax Stock -- Potential
Diverging Interests -- Operational and Financial Decisions" and " -- Allocation
of Financing Costs; Transfers of Funds Between Groups; Equity Contributions" and
" Certain Management and Allocation Policies."
The terms of sale-leaseback and securitization transactions are affected by
a number of other factors which are beyond the control of CarMax and the
Company, including, among others, conditions in the securities and finance
markets generally, prevailing interest rates, conditions in the markets for
securitized instruments and lease financings and approval by all parties to the
terms of the transaction. Profits from the extension of credit for vehicle
financing contribute significantly to the profitability of CarMax. Any increase
in the cost of sale-leaseback or securitization financings would increase the
effective rental cost of real estate or reduce the profitability of CarMax's
vehicle financing activities and, if significant, could have a material adverse
effect on the business, results of operations and financial condition of CarMax.
If for any reason the Company were unable to undertake securitization
transactions or otherwise sell its installment loan receivables, the net profit
from such receivables would be recognized over the life thereof rather than at
the time of the sale, which could have a material adverse effect on the results
of operations in a particular financial period.
Capital may also be raised by the Company through additional public or
private financings or borrowings; however, there can be no assurance that the
Company will be able to do so or that, if it does, the funds raised would be
made available to the CarMax Group. If additional funds are raised by issuing
equity securities allocated to the CarMax Group, dilution to the holders of
outstanding shares of CarMax Stock may result. See " -- Factors Relating to the
CarMax Stock -- Absence of Prior Market for CarMax Stock; Possible Volatility of
Stock Price."
15
<PAGE>
SOURCING OF USED CARS
CarMax acquires a significant proportion of its used-vehicle inventory
through its appraisal process in which CarMax appraises and makes an offer to
purchase any properly documented vehicle from the public. 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. Some of the auctions for vehicles are closed except to the franchised
dealers of specific manufacturers. 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. However, there can be no assurance that
sufficient inventory from such sources will continue to be available, or will be
available at comparable costs, particularly if changes occur in the type or
proportion of used vehicles that are sold in auctions closed to CarMax or if
competitive pressures increase as a result of new entrants to this market. See
" -- Highly Competitive Industry; New Entrants." Any reduction in inventory
availability, or increase in inventory wholesale costs that are not reflected in
retail market prices, for these or other reasons, could have a material adverse
effect on the business, results of operations and financial condition of CarMax
and its planned expansion.
DEPENDENCE UPON AND AVAILABILITY OF KEY PERSONNEL
CarMax's success will depend to a significant degree upon the continued
services of its senior management team as well as the Group's ability to attract
qualified personnel, including experienced location general managers, as the
business grows. In addition, the future performance of CarMax will depend upon
the Group's continued access to certain Circuit City Group personnel who are
experienced in rapid retail expansion, sale-leaseback and securitization
financing, consumer credit, site selection and facilities construction. The loss
of the services of key personnel, or the inability to attract and retain
additional personnel as needed, could have a material adverse effect upon CarMax
and its planned expansion.
UNCERTAINTY REGARDING EXPANSION OF RETAIL REPAIR SERVICE OPERATIONS
CarMax plans to expand its retail repair service operations commencing in
fiscal 1998 in order to achieve greater future profitability, attract new
customers and further develop customer loyalty. The Atlanta, Georgia stores are
currently serving as the prototypes for this expanded service function. Although
CarMax is developing new systems and procedures intended to result in efficient,
profitable retail repair service operations, there can be no assurance that
CarMax will be successful in doing so.
MANUFACTURER CONTROL OVER EXISTING AND NEW FRANCHISES; FRANCHISE AGREEMENT
WITH CHRYSLER
One component of the CarMax growth strategy is to acquire additional
new-vehicle franchises both through acquisition of franchises within the
territory of its existing and future used-vehicle stores and through new grants.
CarMax's goal is to add more than 25 new-car franchises to its used-car
operations over the initial phase of its rollout through 2002. Given the
relative unavailability of new franchises and the limited availability of
franchises within a suitable radius of its existing and proposed stores, there
is no assurance that CarMax will be able to achieve this portion of its growth
plan. In addition, manufacturers have historically exercised significant control
over their franchisees, restricting them to specified locations and retaining
approval rights over changes in management and ownership. The ability of CarMax
to acquire existing franchises, as well as new franchises, will therefore depend
on obtaining the approval of manufacturers, and there can be no assurance that
CarMax will be able to obtain the requisite approvals from manufacturers on
acceptable terms. Certain manufacturers may be reluctant to approve acquisitions
by CarMax of new or existing franchises because of, among other things, their
opposition to diffuse corporate ownership of their dealerships, the potential
adverse effects on their existing franchisees or concerns with a single company
owning a large number of dealerships.
CarMax operates its new car dealership in the Atlanta, Georgia market under
a Sales and Service Agreement (the "Franchise Agreement") between Chrysler and a
subsidiary of the Company. 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, including a breach by
CarMax of any of its obligations thereunder, or if, without Chrysler's prior
approval, the Company ceases to control the subsidiary that entered into the
agreement. See "Business of the CarMax Group -- Franchise Agreement with
Chrysler."
16
<PAGE>
CYCLICALITY OF AUTOMOBILE SALES; GEOGRAPHIC CONCENTRATION
Unit sales of vehicles, particularly new vehicles, historically have been
cyclical, fluctuating with general economic cycles. During economic downturns,
the automotive retailing industry tends to experience similar periods of decline
and recession as the general economy. Although there has been a general trend of
increasing sales of used vehicles since 1991, there can be no assurance that the
industry will not experience sustained periods of decline in vehicle sales in
the future. CarMax believes that the industry is also influenced by consumer
confidence, the level of personal discretionary spending, interest rates and
credit availability. Any future adverse changes in economic conditions could
have a material adverse effect on the business, results of operations and
financial condition of CarMax and its planned expansion.
In addition to being affected by general economic trends, the success of
CarMax depends, in part, on regional auto-buying trends, local and regional
economic factors and other regional competitive pressures. Currently, CarMax
sells its vehicles in Virginia, North Carolina, Florida and Georgia. Conditions
and competitive pressures affecting these markets, such as price-cutting by
dealers in these areas or in new markets CarMax enters, or a general economic
downturn in the region, could adversely affect CarMax, although the automotive
retail industry as a whole might not be affected.
SEASONALITY
The business of CarMax is seasonal, with a disproportionate amount of sales
currently occurring in the first half of the fiscal year. Seasonality causes
difficulties in planning for a variety of resources, including personnel and
inventory, and may also make it difficult to detect, and respond in a timely and
effective way to, downturns in retailing when they occur, thereby increasing
risks inherent in the business. CarMax anticipates that the seasonality of its
business may vary from region to region as the Group expands its operations
geographically.
CREDIT RISK
Payments by customers on a number of the installment sales contracts
originated by FNAC become delinquent from time to time and some contracts end up
in default. There can be no assurance that the current credit performance of
FNAC's customers will be maintained or that general economic conditions will not
worsen and lead to higher rates of delinquency and default. While CarMax retains
limited liability with respect to such delinquencies or defaults under its
current securitization program, a general decline in the quality of its contract
portfolio could lead CarMax to reduce the availability of credit through FNAC,
with a corresponding decrease in sales and profitability.
LEGAL PROCEEDINGS
CarMax is currently involved in litigation relating to its right to use the
mark CARMAX. See "Business of the CarMax Group -- Legal Proceedings and
Insurance." While the Company believes that there is no merit to the allegations
and claims made by the other party to this litigation, an adverse outcome could
have a material adverse effect on the results of operations of CarMax during the
period in which the litigation is decided.
CarMax may be exposed to potential liabilities for personal injury or
property damage claims relating to the use of vehicles and other products sold
by it. Although CarMax maintains third-party product liability insurance and
other types of insurance in amounts it considers adequate, and the manufacturers
are required to indemnify CarMax for most product liability claims, there can be
no assurance that CarMax will not experience material legal claims in excess of
its insurance coverage, or material claims (such as those relating to its use of
the mark CARMAX) that ultimately would not be covered by insurance or
indemnification from the manufacturers. Furthermore, if any significant claims
are made against CarMax, the business of CarMax may be adversely affected by
resulting negative publicity.
ENVIRONMENTAL MATTERS; GOVERNMENT REGULATION
The business of CarMax involves the use, handling and disposal of hazardous
or toxic substances as well as the past and current operation and/or removal of
aboveground and underground storage tanks containing such substances.
Accordingly, CarMax is subject to federal, state and local laws and regulations
governing air and water quality and the handling, storage and disposal of
hazardous or toxic substances. Although CarMax believes that it does not have
any material environmental liabilities, compliance with new or more stringent
laws or regulations, stricter interpretations of existing laws or regulations or
the future discovery of environmental conditions at current or future CarMax
locations could require additional expenditures by CarMax, some of which could
be material.
The CarMax operations are also subject to ongoing regulation, supervision
and licensing under various other federal, state and local statutes, ordinances
and regulations. Among other things, these laws require that CarMax obtain and
maintain
17
<PAGE>
certain licenses and regulate the manner in which CarMax conducts its business,
including its advertising and sales practices. In addition, the financing
activities of CarMax with its customers are subject to federal truth in lending,
consumer lending and equal credit opportunity regulations as well as state and
local motor vehicle finance laws, installment finance laws, usury laws and other
installment sales laws. CarMax believes that it is currently in substantial
compliance with all such laws affecting its business. Any failure to comply with
such laws or any adverse change in such laws, whether by the adoption of new
laws, changes in the interpretation of existing laws or CarMax's entrance into
jurisdictions with more stringent regulatory requirements, could have a material
adverse effect on the business, results of operations and financial condition of
CarMax.
DILUTION
Purchasers of the CarMax Stock in the Offering will experience an immediate
and substantial dilution in the net tangible book value of their shares. See
"Dilution."
FACTORS RELATING TO THE CARMAX STOCK
SHAREHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS ON ONE GROUP COULD AFFECT THE
OTHER
Notwithstanding the allocation of assets and liabilities (including
contingent liabilities) and shareholders' equity between the CarMax Group and
the Circuit City Group for the purpose of preparing their respective financial
statements, holders of CarMax Stock and Circuit City Stock will be shareholders
of the Company and will continue to be subject to all of the risks associated
with an investment in the Company and all of its businesses, assets and
liabilities. Such allocation and the change in the equity structure of the
Company resulting from the implementation of the CarMax Stock Proposal will not
affect title to the assets or responsibility for the liabilities of the Company
or any of its subsidiaries and, therefore, will not affect the rights of holders
of any debt of the Company or its subsidiaries. Financial impacts arising from
the Circuit City Group that affect the Company's results of operations or
financial condition could affect the results of operations or financial
condition of the CarMax Group and the market price of the CarMax Stock. In
addition, any net losses of the Circuit City Group and dividends or
distributions on, or repurchases of, Circuit City Stock will reduce the legally
available funds of the Company available for payment of dividends on the CarMax
Stock. Accordingly, the Company's consolidated financial information should be
read in conjunction with the CarMax Group financial information.
The Company will provide to holders of CarMax Stock financial statements,
management's discussion and analysis of financial condition and results of
operations, business descriptions and other information for each Group and for
the consolidated Company. The financial statements of the CarMax Group will
reflect the financial position, results of operations and cash flows of the
businesses included therein. Consistent with the Amended Articles and relevant
policies, the CarMax Group's financial statements will also include allocated
portions of the Company's corporate assets and liabilities (including contingent
liabilities) that are not separately identified with the operations of a
specific Group. See "Certain Management and Allocation Policies" and the
financial information of the CarMax Group and the Company set forth herein.
LIMITED SEPARATE SHAREHOLDER VOTING RIGHTS; EFFECTS ON VOTING POWER
Holders of CarMax Stock and Circuit City Stock will have only the rights
customarily held by common shareholders of the Company and will not have any
rights related to their corresponding Group or have any right to vote on matters
as a separate voting group other than in limited circumstances as provided under
the Virginia Stock Corporation Act ("VSCA"). Under the VSCA, the holders of
CarMax Stock and Circuit City Stock will vote together as a single voting group,
except as to certain mergers and statutory share exchanges and certain
amendments to the Articles. Accordingly, if a separate vote on a matter by the
holders of either the CarMax Stock or Circuit City Stock is not required under
the VSCA, and if the Board of Directors does not require a separate vote, any
series that is entitled to more than the number of votes required to approve
such matter will be in a position to control the outcome of the vote on such
matter even if the matter involved a divergence or the appearance of a
divergence of the interests between the holders of the CarMax Stock and Circuit
City Stock. Conversely, if a separate vote on a matter by the holders of either
CarMax Stock or Circuit City Stock is required under the VSCA or by the Board of
Directors, the holders of either the CarMax Stock or Circuit City Stock could
prevent approval of such matter, notwithstanding the fact that the holders of a
majority or more than two-thirds, as applicable, of the total number of votes
entitled to be cast with respect to both the CarMax Stock and Circuit City Stock
had voted in favor of it. See "Description of Capital Stock -- Voting Rights"
and " -- Potential Diverging Interests -- Allocation of Proceeds of Mergers or
Statutory Share Exchanges."
18
<PAGE>
The relative voting power of shares of CarMax Stock and Circuit City Stock
will fluctuate from time to time, with each share of Circuit City Stock having
one vote and each share of CarMax Stock having a variable number of votes, based
upon the ratio, over a specified period, of the time-weighted average Market
Value of one share of CarMax Stock to the time-weighted average Market Value of
one share of Circuit City Stock. This formula is intended to equate the
proportionate voting rights of each series of Common Stock to their respective
Market Values at the time of any vote. The Company anticipates that the Circuit
City Stock will initially represent a substantial majority of the voting power
of all the Company's stock entitled to vote in the election of directors. Market
Value could be influenced by many factors, including the results of operations
of the Company and each of the Groups, trading volume, share issuances and
repurchases and general economic and market conditions. See "Description of
Capital Stock -- Voting Rights." Changes in the aggregate votes or relative
voting power of the CarMax Stock could result from the market's reaction to a
decision by the Company's management or Board of Directors that is perceived to
disparately affect one series of Common Stock in comparison to the other or the
issuance or repurchase of shares of Common Stock of either series. See
" -- Limited Approval Rights of Future Issuances."
FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS; NO DEFINITIVE PRECEDENT UNDER
VIRGINIA LAW
Under Virginia law, each member of the Board of Directors must act in
accordance with his or her good faith business judgment of the best interests of
the Company, taking into consideration the interests of all common shareholders.
As further described below, the existence of separate series of Common Stock may
give rise to occasions when the interests of the holders of CarMax Stock and the
holders of Circuit City Stock may diverge or appear to diverge. Although the
Company is not aware of any precedent concerning the manner in which principles
of Virginia law would be applied in the context of the capital structure
contemplated by the CarMax Stock Proposal, principles of Virginia law provide
that directors must act in accordance with their good faith business judgment of
the corporation's best interests, taking into consideration the interests of all
common shareholders regardless of class or series. Under these principles of
Virginia law, a good faith determination made by a disinterested and adequately
informed Board of Directors with respect to any matter having a disparate impact
upon the holders of CarMax Stock and the holders of Circuit City Stock would be
a defense to any challenge to such determination made by or on behalf of either
group of holders. Nevertheless, a Virginia court hearing a case involving such a
challenge may decide to apply principles of Virginia law other than those
discussed above, or may fashion new principles of Virginia law, in order to
decide such a case, which would be a case of first impression. There may arise
circumstances involving a divergence of interests in which the Board of
Directors is held to have properly discharged its duty to act in accordance with
its good faith business judgment of the best interests of the Company, but in
which holders of either the CarMax Stock or the Circuit City Stock consider
themselves to be disadvantaged relative to the other series. In such a case,
such holders would not have any other remedy under Virginia law with respect to
the circumstances giving rise to the divergence of interests.
Disproportionate ownership interests of members of the Board of Directors
in the CarMax Stock and the Circuit City Stock or disparate values of the CarMax
Stock and the Circuit City Stock could create or appear to create potential
conflicts of interest when directors are faced with decisions that could have
different implications for the different series. See " -- Potential Diverging
Interests."
POTENTIAL DIVERGING INTERESTS
The existence of separate series of Common Stock could give rise to
occasions when the interests of the holders of CarMax Stock and holders of
Circuit City Stock diverge or appear to diverge. Examples include determinations
by the Board of Directors to (i) pay or omit the payment of dividends on CarMax
Stock or Circuit City Stock, (ii) allocate consideration to be received by
holders of each of the series of Common Stock in connection with a merger or
consolidation involving the Company, (iii) convert one series of Common Stock
into shares of the other series of Common Stock, (iv) approve certain
dispositions of assets attributed to any Group, (v) so long as there is an
Inter-Group Interest, allocate the proceeds of issuances of CarMax Stock either
to the Circuit City Group in respect of its Inter-Group Interest or to the
CarMax Group and (vi) make operational and financial decisions with respect to
one Group that could be considered to be detrimental to the other Group,
including whether to make transfers of funds between Groups, as described below.
When making decisions with regard to matters that create potential diverging
interests, the Board of Directors would act in accordance with the terms of the
Articles, the management and allocation policies described in "Certain
Management and Allocation Policies" to the extent applicable and its fiduciary
duties. See " -- Fiduciary Duties of the Board of Directors; No Definitive
Precedent Under Virginia Law." The Board of Directors could also from time to
time refer matters involving such conflict issues to an existing committee or
one or more new committees of the Board of Directors and have such committee or
committees report to the Board of Directors on such matters or decide such
matters to the extent permitted by the Bylaws and applicable law. Each of the
foregoing potential conflicts of interests is discussed below:
19
<PAGE>
NO ASSURANCE OF PAYMENT OF DIVIDENDS. The Board of Directors currently does
not intend to pay dividends on the CarMax Stock. The Board of Directors
currently intends to pay dividends on the Circuit City Stock at a quarterly rate
of 3.5(cents) per share. Determinations as to the future dividends on the CarMax
Stock and the Circuit City Stock would be based primarily upon the financial
condition, results of operations and business requirements of the relevant Group
and the Company as a whole. Dividends on the CarMax Stock and the Circuit City
Stock, if any, would be payable out of the lesser of (i) all assets of the
Company legally available for the payment of dividends and (ii) the Available
Dividend Amount with respect to the relevant Group. Subject only to such
limitations, the Board of Directors reserves the right to declare and pay
dividends on either series of the Common Stock in any amount and could, in its
sole discretion, declare and pay dividends exclusively on the CarMax Stock,
exclusively on the Circuit City Stock or on both, in equal or unequal amounts,
notwithstanding the relative amounts of the CarMax Group Available Dividend
Amount and the Circuit City Group Available Dividend Amount, the amount of prior
dividends declared on each series, the respective voting or liquidation rights
of each series or any other factor. In addition, net losses of the Circuit City
Group, dividends and distributions on Circuit City Stock or any Preferred Stock
and repurchases of Circuit City Stock or certain preferred stock would reduce
the assets of the Company legally available for future dividends on the CarMax
Stock. See "Dividend Policy" and "Description of Capital Stock -- Dividends."
ALLOCATION OF PROCEEDS OF MERGERS OR STATUTORY SHARE EXCHANGES. The Amended
Articles do not contain any provisions governing how consideration to be
received by holders of Common Stock in connection with a merger or statutory
share exchange involving the entire Company is to be allocated among holders of
different series of Common Stock. In any such merger or statutory share
exchange, the percentage of the consideration to be allocated to holders of any
series of Common Stock will be determined by the Board of Directors and may be
materially more or less than that which might have been allocated to such
holders had the Board of Directors chosen a different method of allocation. See
" -- Limited Separate Shareholder Voting Rights; Effects on Voting Power."
OPTIONAL CONVERSION OF SERIES OF COMMON STOCK. The Board of Directors
could, in its sole discretion, determine to convert shares of the series of
Common Stock of one Group into shares of the series of Common Stock of the other
Group at a 15% premium at any time or a 10% premium following any dividend or
partial redemption undertaken in connection with a disposition of all or
substantially all of the properties or assets attributed to the Group whose
stock is being converted. Any such determination could be made at a time when
either or both of the CarMax Stock and the Circuit City Stock may be considered
to be overvalued or undervalued. Any conversion of Circuit City Stock into
CarMax Stock at any premium would dilute the interests in the Company of the
holders of CarMax Stock. In addition, any such conversion of either series of
Common Stock into the other would preclude holders of both series of Common
Stock from retaining their investment in a security that is intended to reflect
separately the performance of the relevant Group. If CarMax Stock were converted
into Circuit City Stock, holders of shares of the CarMax Stock could receive a
greater or lesser premium than any premium that might be paid by a third-party
buyer of all or substantially all of the assets attributed to the CarMax Group.
In determining whether to convert one series of Common Stock into the other
series of Common Stock, the Board of Directors would act in accordance with its
good faith business judgment that any such conversion is in the best interests
of the Company, taking into consideration the interests of all common
shareholders, including both the holders of the series of Common Stock being
converted and the holders of the series of Common Stock into which it is to be
converted. See "Description of Capital Stock -- Conversion and Redemption."
DISPOSITIONS OF GROUP ASSETS. Assuming the assets attributed to any Group
represent less than substantially all of the properties and assets of the
Company, the Board of Directors could, in its sole discretion and without
shareholder approval, approve sales and other dispositions of any amount of the
properties and assets attributed to such Group, because Virginia law and the
Amended Articles would require shareholder approval only for a sale or other
disposition of all or substantially all of the properties and assets of the
entire Company. The proceeds from any such disposition would be assets
attributed to such Group and used for its benefit, subject to the management and
allocation policies described under "Certain Management and Allocation
Policies." The Amended Articles will contain provisions that, in the event of a
Disposition of all or substantially all of the properties and assets attributed
to any Group, other than in a Related Business Transaction, require the Company
to (i) distribute to holders of the series of Common Stock relating to the Group
subject to such Disposition an amount in cash and/or securities or other
property equal to their proportionate interest in the Fair Value of the Net
Proceeds of such Disposition either by special dividend or redemption of all or
part of the shares of such series of Common Stock or (ii) convert the
outstanding shares of such Common Stock into a number of shares of the series of
Common Stock relating to the other Group equal to 110% of the ratio, calculated
over a period of time, of the average Market Value of one share of the Common
Stock relating to the Group subject to such Disposition to the average Market
Value of one share of Common Stock relating to the other Group. See "Description
of Capital Stock -- Conversion and Redemption." The terms of the Common Stock do
not require the Board of Directors to select the option that would result in the
distribution with the highest value to
20
<PAGE>
the holders of the Common Stock relating to the Group subject to such
Disposition or with the smallest effect on the Common Stock relating to the
other Group. The Board of Directors would select an option based upon its good
faith business judgment that such option is in the best interests of the
Company, taking into consideration the interests of all common shareholders. See
" -- Fiduciary Duties of the Board of Directors; No Definitive Precedent under
Virginia Law."
ALLOCATION OF PROCEEDS UPON ISSUANCE OF CARMAX STOCK. If the Circuit City
Group, at the time the Company issues any shares of CarMax Stock, holds an
Inter-Group Interest representing an interest in the equity value of the CarMax
Group, the Board of Directors would, in its sole discretion, determine whether
to allocate all or any portion of the proceeds of such issuance to the CarMax
Group or to the Circuit City Group. To the extent the net proceeds of such
issuance of shares of CarMax Stock are allocated to the CarMax Group, the
financial statements of the CarMax Group would reflect the receipt of such
proceeds. To the extent such net proceeds are allocated to the Circuit City
Group, the financial statements of the Circuit City Group would reflect a
reduction in the Inter-Group Interest and the receipt of such proceeds. Any such
allocation may favor one Group at the expense of the other. For example, the
decision to allocate proceeds to the Circuit City Group may adversely affect the
ability of the CarMax Group to obtain funds. Any such allocation will be made by
the Board of Directors in its good faith business judgment that such allocation
is in the best interests of the Company, taking into consideration the interests
of all common shareholders. See " -- Fiduciary Duties of the Board of Directors;
No Definitive Precedent Under Virginia Law." In addition, if the Company issues
shares of CarMax Stock for the account of the Circuit City Group in respect of
the Circuit City Group's Inter-Group Interest in the CarMax Group, the voting
power of holders of shares of CarMax Stock immediately prior to such issuance
would be diluted even though no consideration received for such shares would be
allocated to the CarMax Group.
OPERATIONAL AND FINANCIAL DECISIONS. The Board of Directors could, in its
sole discretion, from time to time, make operational and financial decisions or
implement policies that affect disproportionately the businesses of the CarMax
Group and the Circuit City Group, such as transfers of services, funds or assets
between Groups and other inter-Group transactions, the allocation of financing
opportunities in the public markets and the allocation of business
opportunities, resources and personnel that may be suitable for both Groups. Any
such decision may favor one Group at the expense of the other. For example, the
decision to obtain funds for the Circuit City Group may adversely affect the
ability of the CarMax Group to obtain funds sufficient to implement its growth
strategies. All such decisions will be made by the Board of Directors in its
good faith business judgment or in accordance with procedures and policies
adopted by the Board of Directors from time to time, including the policies
described under "Certain Management and Allocation Policies," to ensure that
such decisions will be made in a manner consistent with the best interests of
the Company, taking into consideration the interests of all common shareholders.
For further discussion of potential divergence of interests, see " -- Fiduciary
Duties of the Board of Directors; No Definitive Precedent Under Virginia Law,"
" -- Allocation of Financing Costs; Transfers of Funds Between Groups; Equity
Contributions" and "Certain Management and Allocation Policies."
MANAGEMENT AND ALLOCATION POLICIES SUBJECT TO CHANGE
The Company's policies described herein with respect to dividends, the
allocation of corporate expenses, assets and liabilities, the allocation of
proceeds of sales of CarMax Stock and Circuit City Stock and other matters may
be modified or rescinded, or additional policies may be adopted, in the sole
discretion of the Board of Directors without approval of the shareholders,
although the Board of Directors has no present intention to do so. Any
determination of the Board of Directors to modify or rescind such policies, or
to adopt additional policies, including any such decision that would have
disparate impacts upon holders of CarMax Stock and holders of Circuit City
Stock, would be made in accordance with the Board of Director's good faith
business judgment of the best interests of the Company, taking into
consideration the interests of all common shareholders. See " -- Potential
Diverging Interests."
ALLOCATION OF FINANCING COSTS; TRANSFERS OF FUNDS BETWEEN GROUPS; EQUITY
CONTRIBUTIONS
As described under "Certain Management and Allocation Policies," most
financial activities will be managed by the Company on a centralized basis. Such
financial activities include the investment of surplus cash, the issuance and
repayment of short-term and long-term debt and the issuance and repurchase of
any Preferred Stock. In the event that cash or other property allocated to one
Group is transferred to the other Group (other than transfers made with respect
to the Inter-Group Interest upon the payment of any dividend or other
distribution on CarMax Stock), such transfer would be accounted for in one of
the following ways, as determined by the Board of Directors: (i) as a
reallocation of pooled debt, as described under the caption referred to above,
or Preferred Stock, (ii) as an increase or decrease in the Number of Shares
Issuable with Respect to the Inter-Group Interest, (iii) as a sale of assets
between the two Groups, or (iv) as a short-term or long-term loan from one Group
to the other Group. There are no specific criteria to determine which of the
foregoing would be applied to a
21
<PAGE>
particular transfer of cash or property from one Group to the other Group. Such
determination would be made by the Board of Directors in the exercise of its
business judgment based upon all relevant circumstances, including the financing
needs and objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
Any such determination could affect the amount of interest or dividend expense
reflected in the financial statements of the CarMax Group. All transfers of
material assets from one Group to the other Group will be deemed to be made on a
fair value basis for the foregoing purposes, as determined by the Board of
Directors.
A portion of the Company's debt and any Preferred Stock may be allocated to
each Group, and interest or dividend expense will be charged to each Group,
based on the weighted average interest or dividend rate of such pooled debt or
Preferred Stock. As a result, changes in the amount of pooled debt or Preferred
Stock would affect such weighted average interest or dividend rate and,
therefore, would affect the interest or dividend expense charged to both Groups
in respect of their allocated portions. In addition, if the CarMax Group obtains
its financing through increases of its allocated pooled debt or Preferred Stock
balance, the CarMax Group would receive a "benefit" or "detriment" to the extent
such weighted average rate is lower or higher, respectively, than the market
rate for a hypothetical borrowing of debt or issuance of Preferred Stock by the
CarMax Group if the CarMax Group were a stand-alone corporation. Debt and
Preferred Stock of the Company also may be allocated in its entirety to one
Group as determined by the Board of Directors.
The Board of Directors could, in its sole discretion, determine that a
transfer of cash or other property from one Group to the other Group should be
accounted for as a short-term or long-term loan. The Board of Directors would
establish the terms on which loans between the Groups would be made, including
interest rate, amortization schedule, maturity and redemption terms. In the
event that the Board of Directors determines that a transfer of funds from the
Circuit City Group to the CarMax Group should be accounted for as a loan, the
CarMax Group would receive a "benefit" or "detriment" to the extent the rate
determined by the Board of Directors is lower or higher, respectively, than the
market rate for a hypothetical borrowing of debt by the CarMax Group if the
CarMax Group were a stand-alone corporation.
The Board of Directors also could, in its sole discretion, determine from
time to time to contribute, as additional equity, cash or other property of the
Circuit City Group to the CarMax Group, thereby increasing the Inter-Group
Interest. Similarly, the Board of Directors could, in its sole discretion,
determine from time to time to transfer cash or other property from the CarMax
Group to the Circuit City Group as a reduction in such equity, thereby
decreasing the Inter-Group Interest. Although any increase in the Inter-Group
Interest resulting from an equity contribution by the Circuit City Group to the
CarMax Group or any decrease in the Inter-Group Interest resulting from a
transfer of funds from the CarMax Group to the Circuit City Group would be
determined by reference to the then current Market Value of CarMax Stock, such
changes could occur at a time when such shares could be considered undervalued
or overvalued. The holders of outstanding shares of CarMax Stock would not have
an opportunity to participate in a similar transaction.
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS ATTRIBUTED TO A GROUP
The terms of the Common Stock provide that upon a Disposition of all or
substantially all of the properties and assets attributed to any Group, the
Company would be required, subject to certain exceptions, either to pay a
special dividend on, or redeem some or all of, the outstanding shares of the
series of Common Stock relating to such Group or convert such Common Stock into
shares of the series of Common Stock relating to the other Group. If the CarMax
Group were instead a separate, independent company and its shares were acquired
by another person, certain costs of a Disposition relating to the CarMax Group,
including corporate level taxes, might not be payable in connection with such an
acquisition. As a result, the consideration that would be received by
shareholders of such a separate independent company in connection with such an
acquisition might be greater than the Fair Value of the Net Proceeds that would
be received by holders of the CarMax Stock if the assets attributed to the
CarMax Group were sold. In addition, no assurance can be given that the Net
Proceeds per share of the CarMax Stock to be received in connection with any
such Disposition of all of the assets attributed to the CarMax Group will be
equal to or more than the market value per share of the CarMax Stock prior to or
after announcement of such Disposition. See "Absence of Prior Market for CarMax
Stock; Possible Volatility of Stock Price" and "Description of Capital Stock --
Conversion and Redemption -- Mandatory Dividend, Redemption or Conversion of
Common Stock."
LIMITED APPROVAL RIGHTS OF FUTURE ISSUANCES
The approval of the shareholders of the Company will not be solicited by
the Company for the issuance from the authorized but unissued shares of CarMax
Stock or Circuit City Stock (including from shares that were previously
designated as part of the other series but are unissued) unless such approval is
deemed advisable by the Board of Directors or is required by stock exchange
regulations or under the VSCA.
22
<PAGE>
LIMITATIONS ON POTENTIAL ACQUISITIONS OF THE CARMAX GROUP
If the CarMax Group were organized as a stand-alone corporation, any person
interested in acquiring such corporation without negotiation with management
could seek control of the outstanding stock of such corporation by means of a
tender offer or proxy contest. Although the CarMax Stock is intended to reflect
the separate performance of the CarMax Group, a person interested in acquiring
only the CarMax Group without negotiation with the Company's management would
still be required to seek control of the voting power represented by all of the
outstanding capital stock of the Company, including the Circuit City Stock. See
" -- Limited Separate Shareholder Rights; Effects on Voting Power" and
"Description of Capital Stock -- Voting Rights."
ABSENCE OF PRIOR MARKET FOR CARMAX STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public trading market for the
CarMax Stock. Although the CarMax Stock will be listed on the New York Stock
Exchange ("NYSE"), there can be no assurance that a regular trading market for
the CarMax Stock will develop after the Offering or, if developed, that it will
be sustained following the Offering. Similarly, no assurance can be given that
the CarMax Stock will continue to be listed on the New York Stock Exchange. The
initial public offering price of the CarMax Stock offered hereby will be
determined through negotiations between CarMax and the Underwriters and may not
necessarily bear any relationship to the price at which the CarMax Stock will
trade after completion of the Offering, or to the book value, assets, past
operating results, or financial condition of CarMax or to any other established
criteria of value. Because CarMax will be one of the first public companies
dedicated primarily to the used-vehicle retail business, the Underwriters will
be limited in their ability to use the market prices of other companies in the
same industry as a benchmark in setting the initial public offering price. See
"Underwriters."
The CarMax Stock is intended to reflect the performance of the CarMax
Group. Because there is no public market for the CarMax Stock, there can be no
assurance that the market price of the CarMax Stock will reflect the performance
of the CarMax Group or that the performance of the Circuit City Group would not
affect the market price of the CarMax Stock. In addition, the Company cannot
predict the impact on the market price of certain terms of the CarMax Stock or
Circuit City Stock, including the respective redemption and conversion rights
applicable upon the disposition of substantially all the assets attributed to
either Group, the ability of the Company to convert shares of one series of
Common Stock into shares of the other series of Common Stock, the discretion of
the Board of Directors to make various determinations relating to the separate
series, or the availability of additional shares of CarMax Stock for future
sale, including shares of CarMax Stock attributable to the Circuit City Group's
Inter-Group Interest in the CarMax Group.
Sales of substantial amounts of CarMax Stock by the Company or others in
the public market following the Offering, or the perception that such sales may
occur, could adversely affect the market price of the CarMax Stock. Any issuance
of additional shares of CarMax Stock may be authorized by the Board of Directors
from time to time from the authorized but unissued shares of Common Stock
(including from shares that were previously designated as Circuit City Stock but
are unissued) without shareholder approval unless such approval is deemed
advisable by the Board of Directors or is required by stock exchange regulations
or under the VSCA. In connection with the Offering, the Company has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated, it will
not offer, sell, contract to sell or otherwise dispose of any shares of CarMax
Stock, or any securities convertible into or exchangeable for CarMax Stock, for
a period of 180 days after the date of this Prospectus, subject to certain
exceptions.
As a result of all of these factors, as well as other factors common to
initial public offerings, the market price could fluctuate substantially from
the offering price.
23
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the CarMax Stock offered
hereby are estimated to be approximately $284.9 million ($327.7 million if the
U.S. Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and estimated offering expenses based upon an assumed
initial public offering price of $16 per share.
The shares of CarMax Stock offered hereby will be issued for the account of
the CarMax Group. The Company intends to use the net proceeds to finance part of
the Company's expansion plans for the CarMax Group and to repay the CarMax
Group's allocated portion of Company indebtedness. For more information on how
the Company intends to obtain future financing for its expansion plans for the
CarMax Group, see "CarMax Group Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Financial Condition -- Liquidity and
Capital Resources." As of November 30, 1996, the CarMax Group had total debt
outstanding of $172 million (consisting of its allocated portion of Company
indebtedness) with an effective interest rate of 6.25% per annum. Such debt was
incurred by the Company primarily to finance CarMax's growth to date. As of
January 9, 1997, the Company's indebtedness to be repaid with the net proceeds
from the Offering had a weighted average interest rate of 5.53% per annum with
varying final maturities up to five years from the date hereof. Most financial
activities of the Company, including its cash management, are managed centrally.
Pending its use by the CarMax Group, that part of the net proceeds that is to be
used to finance expansion of CarMax may be used to make a temporary
interest-bearing loan to the Circuit City Group and used to repay short-term
bank borrowings allocated to the Circuit City Group. See "Certain Management and
Allocation Policies."
DIVIDEND POLICY
The Company does not currently anticipate paying dividends on the CarMax
Stock in the foreseeable future but intends to retain future earnings, if any,
for the expansion of the business of the CarMax Group. The Company currently
intends to pay dividends on the Circuit City Stock at a quarterly rate of 3.5
cents per share. While the Company does not currently intend to change the
dividend policies referred to above, it reserves the right to do so at any time
and from time to time.
Subject to the limitations with respect to dividends on the CarMax Stock
and the Circuit City Stock described below under "Description of Capital
Stock -- Dividends," the Board of Directors would be able, in its sole
discretion, to declare and pay dividends exclusively on the CarMax Stock,
exclusively on the Circuit City Stock, or on both, in equal or unequal amounts,
notwithstanding the relative amounts of the CarMax Group Available Dividend
Amount and the Circuit City Group Available Dividend Amount, the amount of prior
dividends declared on each series, the respective voting or liquidation rights
of each series or any other factor.
24
<PAGE>
CAPITALIZATION
The table below for the CarMax Group sets forth the capitalization of the
CarMax Group as of November 30, 1996 and as adjusted to give effect to the
Offering and the application of a portion of the net proceeds to repay the
CarMax Group's allocated portion of Company indebtedness. The table below for
the Company sets forth the total consolidated capitalization of the Company as
of November 30, 1996 and as adjusted to give effect to (a) the Offering and the
application of a portion of the net proceeds to repay the CarMax Group's
allocated portion of Company indebtedness and (b) the Common Stock
Redesignation.
CARMAX GROUP
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
(IN MILLIONS)
Short-term debt.................................................................................. $ 99.7 $ --
Long-term debt................................................................................... 72.6 --
-------- -----------
Total debt..................................................................................... 172.3 --
Accumulated group equity (deficit)............................................................... (15.7) 269.1
-------- -----------
Total capitalization........................................................................... $ 156.6 $ 269.1
-------- -----------
-------- -----------
</TABLE>
THE COMPANY
<TABLE>
<CAPTION>
AS OF NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
(IN MILLIONS)
Short-term debt.................................................................................. $ 593.2 $ 493.4
Current installments of long-term debt........................................................... 1.5 1.5
Long-term debt, excluding current installments................................................... 430.0 357.4
-------- -----------
Total debt.................................................................................. 1,024.7 852.3
-------- -----------
Stockholders' equity:
CarMax Stock................................................................................... -- 9.4
Circuit City Stock............................................................................. -- 49.0
Existing common stock.......................................................................... 49.0 --
Capital in excess of par value................................................................. 100.3 375.7
Retained earnings.............................................................................. 983.2 983.2
-------- -----------
Total stockholders' equity.................................................................. 1,132.5 1,417.3
-------- -----------
Total capitalization........................................................................ $2,157.2 $ 2,269.6
-------- -----------
-------- -----------
</TABLE>
25
<PAGE>
DILUTION
At November 30, 1996, the CarMax Group had a negative net tangible book
value of approximately $15.7 million or $.21 per share equivalent. "Net tangible
book value per share equivalent" at any date represents the amount of the CarMax
Group's tangible assets less total liabilities, divided by the sum of (i) the
Number of Shares Issuable with Respect to the Inter-Group Interest plus (ii) the
number of shares of CarMax Stock outstanding on such date. After giving effect
to the sale by the Company for the account of the CarMax Group of 18,860,000
shares of CarMax Stock in the Offering (at an assumed initial public offering
price of $16.00 per share) and after deducting underwriting discounts and
estimated offering expenses, the CarMax Group's pro forma net tangible book
value at November 30, 1996 would have been $269.1 million or $2.85 per share
equivalent. This represents an immediate increase in the net tangible book value
of the CarMax Group of $3.06 per share equivalent to the Circuit City Group and
an immediate dilution of $13.15 per share equivalent to new investors purchasing
shares of CarMax Stock in the Offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................................... $ 16.00
Net tangible book value per share equivalent at November 30, 1996................. $ (.21)
Increase per share equivalent attributable to new investors....................... $ 3.06
--------
Pro forma net tangible book value per share equivalent after the Offering........... $ 2.85
--------
Dilution per share equivalent to new investors (1).................................. $ 13.15
--------
--------
</TABLE>
- ---------------
(1) If the U.S. Underwriters' over-allotment option is exercised in full, the
pro forma net tangible book value per share equivalent after the Offering
would be $3.21 and dilution per share equivalent to new investors would be
$12.79.
The foregoing computation excludes 4,781,808 shares reserved for issuance
upon the exercise of the CarMax Stock Options, which have a weighted average
exercise price of $.51 per share. Assuming that all such options were exercised
at November 30, 1996, the pro forma net tangible book value per share equivalent
after the Offering would be $2.74 and the dilution per share equivalent to new
investors would be $13.26. Of these 4,781,808 shares, 1,400,000 are reserved for
issuance upon the exercise of CarMax Stock Options held by officers of the
Company at a weighted average exercise price of $.18 per share. If all of the
CarMax Stock Options were exercised in full, (i) the aggregate exercise price
paid by the holders thereof would be $2,444,113 and the 4,781,808 shares of
CarMax Stock issued in connection with such exercise would represent 4.8% of the
total share equivalents outstanding (4.7% if the U.S. Underwriters'
over-allotment option is exercised in full) and (ii) the shares of CarMax Stock
acquired by new investors in the Offering would represent 19.0% of the total
share equivalents outstanding (21.3% if the U.S. Underwriters' over-allotment
option is exercised in full).
26
<PAGE>
BUSINESS OF THE CARMAX GROUP
OVERVIEW
The CarMax Group is a leading retailer of used cars and light trucks in the
United States with six stores located in the Southeast and one vehicle
reconditioning center in Orlando, Florida. CarMax purchases, reconditions and
sells used vehicles at each of its stores and sells new vehicles at one of its
Atlanta, Georgia locations under a franchise agreement with Chrysler. CarMax
provides its customers with a full range of related services, including the
financing of vehicle purchases through its own financing unit, FNAC, and through
third parties, and the sale of service policies. Since opening the first store
in Richmond, Virginia in October 1993, CarMax retail operations have grown
rapidly, with total revenues of $77 million during the first full fiscal year
and $375 million for the nine months ended November 30, 1996. CarMax has
launched an aggressive, six-year rollout plan under which it plans to open one
additional store in Tampa, Florida by the end of fiscal 1997, eight to 10 stores
in fiscal 1998 and 15 to 20 stores each year thereafter through fiscal 2002.
CarMax was established in 1993 by the Company, a leading U.S. consumer
electronics retailer, to revolutionize the highly fragmented used-vehicle retail
market which was estimated at $294 billion in 1995. CarMax was created as a
result of the Company's desire to develop a growth vehicle to sustain the
Company's growth beyond the end of the decade. CarMax was the first used-vehicle
retailer to offer a large selection of quality used vehicles at low, fixed
prices using a customer-friendly sales process in an attractive, modern sales
facility. CarMax has designed a strategy to better serve this market by
addressing the major sources of dissatisfaction with traditional used-car
retailing and to maximize operating efficiencies with sophisticated systems and
standardized operating procedures and store formats. The Circuit City Group's
focus on customer satisfaction and operating efficiency has enabled it to become
one of the largest and most profitable consumer electronics companies in the
United States, with an ongoing and highly successful nationwide rollout of over
400 stores and a 10-year compound annual growth rate in sales and earnings of 26
percent and 27 percent, respectively, for the period ended February 29, 1996.
During the past three years CarMax has leveraged, and continues to leverage,
Circuit City's operational expertise, innovative systems and resources to refine
the used-vehicle retailing concept, to develop store prototypes and proprietary
systems and to implement effective financial and operational controls that now
enable CarMax to embark on an aggressive, nationwide rollout. In addition,
CarMax currently intends to add new-car franchises to some of its existing and
new locations as it grows and to expand its retail repair service operations
commencing in fiscal 1998.
Automotive retailing, with more than $596 billion in 1995 sales, is the
largest consumer retail market in the United States, representing nearly 8
percent of the U.S. gross domestic product. Used-vehicle sales in 1995 were
estimated at $294 billion, with approximately $232 billion in sales by
franchised and independent dealers and the balance in privately negotiated
transactions. CarMax believes that conditions in the used-vehicle retail market,
coupled with its operating and growth strategies, provide CarMax with an
opportunity for substantial growth.
OPERATING STRATEGIES
CarMax has pioneered and implemented operating strategies that enhance
customer satisfaction and loyalty and maximize operating efficiency. Since
opening its first store in Richmond, Virginia in October 1993, CarMax has
successfully implemented its operating model at five additional stores.
Excluding the Orlando, Florida store which opened November 6, 1996, each CarMax
store is profitable on a store-level basis including profits from vehicle
financing but before the allocation of Group overhead expenses. After incurring
significant startup, development and training expenses relating to the
development of the CarMax concept at the Richmond, Virginia store during fiscal
1994 and 1995, the Richmond store became profitable in fiscal 1996. Benefitting
from the refinement of the CarMax concept at the Richmond store, the two stores
in Atlanta, Georgia and the store in Raleigh, North Carolina all achieved such
store-level profitability within the first full year of operation and the store
in Charlotte, North Carolina has been profitable during the period since its
opening in March 1996.
LOW, FIXED "NO-HAGGLE" PRICES
CarMax has implemented an every-day low price strategy under which it sets
fixed, "no-haggle" prices on its used and new vehicles. Most prices are at or
below the best negotiated price in the market. Used vehicles at CarMax are
generally priced from $500 to $1,000 below NADA average book value. Prices on
all vehicles are clearly displayed on each vehicle's price and information
sticker and in CarMax newspaper advertising.
27
<PAGE>
BROAD SELECTION OF HIGH-QUALITY VEHICLES
Each CarMax store features a broad selection of quality used cars and light
trucks with a wide range of prices appealing to a wide range of potential
customers. CarMax stores vary in inventory size from 400 to 1,200 vehicles
depending on local market size and consumer demand. To appeal to the vast array
of consumer preferences and budgets, CarMax offers its used vehicles under two
programs -- the CarMax program and the ValuMax program. CarMax vehicles
generally are one to five years old, with less than 70,000 miles, and most are
priced from $9,500 to $21,000. Through the ValuMax program, CarMax sells
high-quality used vehicles that generally are more than five years old and/or
have over 70,000 miles, with most priced in a range from $4,500 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 and a free, 30-day comprehensive warranty on each vehicle.
EFFICIENT, CUSTOMER-FRIENDLY SALES PROCESS
CarMax has developed a streamlined, innovative sales process that redefines
the way consumers buy vehicles. CarMax believes that the major causes of
consumer dissatisfaction with the traditional car-buying experience include: (i)
dealers' attempts to combine the vehicle purchase transaction with the trade-in
transaction and the sale of related products; (ii) the confrontational
negotiations between the customer and the dealer; (iii) the difficulty the
customer experiences in obtaining sufficient information to make informed
decisions; (iv) interaction with multiple personnel at different stages of the
buying process; and (v) the hidden costs and inflated prices embedded in the
sales process. By contrast, the CarMax process enables customers to separately
evaluate each step of the sales process described below and to make informed
decisions at each step based on complete information about their options and
associated prices. To increase efficiency, the customer is assisted throughout
the CarMax sales process by the same sales consultant and by AutoMation, the
customer-friendly, point-of-sale system that is proprietary to CarMax.
(Bullet) SELECTION AND PRICE. Customers can use AutoMation to
electronically search an entire store's inventory for vehicles that meet
their model and feature requirements and price range. AutoMation displays a
color picture of each vehicle and optionally generates a vehicle
information sheet with the vehicle price and selected features for the
customer's reference and a map directing the customer to the vehicle's
location on the lot. Prices are clearly displayed, along with selected
vehicle features, on each vehicle's price and information window sticker.
The CarMax low, "no-haggle" price policy assures all customers the same low
price and avoids confrontational price negotiations with customers.
(Bullet) TRADE-INS. CarMax has replaced the traditional "trade-in"
transaction with a process in which trained CarMax buyers appraise any
vehicle, usually in 30 minutes or less, and provide the vehicle's owner
with a written guaranteed cash offer that is good for seven days or 250
miles. The appraisal process is available to everyone, whether or not they
are purchasing a vehicle from CarMax. In contrast to the approach of
traditional dealers who seek to combine the vehicle purchase and trade-in
transactions, the CarMax sales process enables the customer to separately
evaluate and make an informed decision with respect to each transaction.
(Bullet) FINANCING. The sales consultant uses AutoMation to
electronically submit financing applications and receive responses from
multiple lenders, generally in less than eight minutes. Customers are then
able to review online with the sales consultant financing options and terms
from each prime financing source that CarMax uses, including the amount
financed, interest rate, term and monthly payment. CarMax believes that, by
contrast, traditional dealers frequently offer inflated financing terms to
customers and do not clearly separate the components of the financing
transaction.
(Bullet) SERVICE POLICIES. CarMax offers primary and extended service
policies that have been custom-designed to its own specifications. CarMax
believes that superior coverage and low, fixed prices distinguish its
service policies from those of its competitors. Through AutoMation, the
customer can review online with the sales consultant all available service
policy options and costs and make an informed, unpressured decision. In
contrast, at many traditional dealers customers may feel pressured into
buying service policies they do not want at inflated prices.
(Bullet) FEES AND OPTIONS. CarMax does not charge processing,
administration, application or other "hidden" fees (as much as $400 at many
traditional auto dealers) and does not attempt to sell other options at
inflated prices. CarMax charges only state-required fees that are clearly
displayed on the vehicles and in the AutoMation system.
CarMax sales personnel play a significant role in ensuring a
customer-friendly sales process. All sales consultants, including both full and
part-time employees, are compensated solely on a commission basis. The amount of
the commission is a fixed dollar amount per vehicle sold. By contrast, sales and
finance personnel at traditional dealerships often receive higher commissions
for negotiating higher prices and for steering customers toward vehicles with
higher gross margins. Most
28
<PAGE>
of the CarMax sales consultants have had prior retail experience before joining
CarMax, and CarMax places great emphasis on integrity and customer-relations
skills in its hiring policies and training programs.
SOPHISTICATED INVENTORY MANAGEMENT SYSTEMS AND CONTROLS
Through its inventory management systems and controls, CarMax minimizes
inventory carrying costs. AutoMation, the central feature of the CarMax
inventory management and control system, enables each vehicle to be tracked
throughout the sales process. Using the information provided by AutoMation, and
applying sophisticated statistical modeling techniques, CarMax is able to
optimize its inventory mix and display by store, anticipate future inventory
needs at each store, evaluate sales consultant performance and refine its
vehicle pricing strategy. CarMax maintains strict inventory aging policies under
which it disposes of any vehicle that has not been sold at retail within
specified periods. Less than one percent of CarMax's retail inventory is
ultimately sold at wholesale.
INCREASED EFFICIENCY THROUGH STANDARDIZATION AND IMPLEMENTATION OF "BEST
PRACTICES"
Since opening its first store in 1993, CarMax has acquired significant
knowledge and experience in operating used-vehicle stores and continually
refines its selling and operating procedures and store prototypes in order to
improve operating efficiency and customer service. As a result of this
experience, CarMax has adopted and implemented the "best practices" throughout
all of its stores by standardizing the most efficient and optimal processes.
CarMax believes that standardization of best practices will enable it to become
a low-cost operator within its industry.
ATTRACTIVE, EFFICIENT STORE PROTOTYPES
The CarMax store format provides an open and attractive physical
environment that CarMax believes enhances its customer-friendly and efficient
sales process and creates a unique shopping experience. The stores are currently
built in three different prototypes, with inventory capacity ranging from 400 to
1,200 cars, depending upon local market size and consumer demand. CarMax has
successfully implemented each of these prototypes.
GROWTH STRATEGIES
CarMax believes its operating strategies and the extensive experience of
its senior management team will enable it to capitalize on the significant
opportunities available in the large, highly-fragmented automotive retailing
industry. CarMax intends to aggressively grow its business through (i) a rapid
rollout of used-vehicle stores; (ii) the expansion of retail repair service
operations; and (iii) the addition of selected new-vehicle franchises.
RAPID ROLLOUT OF USED-VEHICLE STORES
CarMax currently operates six stores, with one each in the Richmond,
Virginia; Raleigh, North Carolina; Orlando, Florida; and Charlotte, North
Carolina markets; and two in the Atlanta, Georgia market. As a result of the
successful operation of its existing stores, CarMax has launched an aggressive,
six-year rollout plan under which it opened one store in Orlando, Florida on
November 6, 1996, and plans to open one additional store in Tampa, Florida by
the end of fiscal 1997, eight to 10 stores in fiscal 1998 (with most opening in
the second half of fiscal 1998), including in the Atlanta, Georgia; Dallas,
Texas; Houston, Texas; South Florida; and Washington-Baltimore markets, and 15
to 20 stores each year thereafter through fiscal 2002. CarMax already has under
contract most of the sites that it plans to open in fiscal 1998. Under the
rollout plan, CarMax expects that it will experience a substantial increase both
in overall square footage and in display capacity, with square footage
increasing from 0.4 million square feet at the end of fiscal 1997 to between 4.6
and 5.9 million square feet at the end of fiscal 2002 and display capacity
increasing from 5,144 vehicles to between 51,000 and 66,000 vehicles over the
same period. In addition to growth from the opening of new stores, CarMax
expects that it will realize significant sales growth from comparable store
sales increases as newly opened stores mature. CarMax believes, based on current
trends, that each store will reach its planned mature sales and earnings
potential by the end of its fourth year. However, given the infrequent repeat
purchase cycle on vehicles, sales and earnings may continue to grow beyond this
initial ramp-up period.
29
<PAGE>
The following table sets forth information concerning the stores and
reconditioning centers that CarMax anticipates will be open by the end of fiscal
1998.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED FEBRUARY 28 OR 29,
---------------------------------------------------
ACTUAL ESTIMATED
----------------------------- ------------------
1994 1995 1996 1997(1) 1998(2)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Stores:
Opened............................................................... 1 1 2 3 9
Operating at Year-End................................................ 1 2 4 7 16
Total Building Space (sq. ft.)....................................... 32,578 72,586 196,048 388,534 971,197
Average Building Space per Store (sq. ft.)........................... 32,578 36,293 49,012 55,505 60,700
Total Display Capacity............................................... 509 1,109 2,909 5,144 11,222
Total Service Bays................................................... 19 36 93 194 464
Reconditioning Centers:
Total Service Bays................................................... -- -- -- 40 120
</TABLE>
- ---------------
(1) Includes Tampa, Florida store scheduled to open by the end of fiscal 1997.
(2) Based on the average of the range for facilities anticipated to be opened in
fiscal 1998.
CarMax is currently targeting 45 of the top 50 U.S. markets. These are the
markets where it believes the most favorable demographic characteristics exist
and prime real estate sites are available on reasonable terms and, accordingly,
where attractive economic returns can be achieved. In selecting sites for its
new stores within a particular market, CarMax first undertakes an extensive
analysis of demographic, cost and other factors similar to the analysis
undertaken by the Circuit City Group when selecting sites for its new stores.
Given the importance of a convenient location in the consumer's decision on
where to shop, CarMax expects that multiple stores will be opened in most major
markets and all will be located in high-visibility, high-traffic commercial
areas. The goal of CarMax is to open most, if not all, of its planned stores
within a particular market as close in time as possible in order to immediately
begin realizing economies of scale in advertising, inventory management and
overhead. Each new store and center will be integrated into the AutoMation
system before opening. To better match individual market demand, CarMax has
developed three store prototypes with different display capacities ranging from
400 to 1,200 vehicles. CarMax has successfully implemented each of these
prototypes. CarMax continually reevaluates its store prototypes and, when
appropriate, makes improvements to promote efficiency in store operations and
enhance customer convenience.
Most of the initial inventory for a new CarMax store is acquired through
auctions and fleet purchases approximately three to four weeks prior to the
scheduled store opening date. As a store matures, an increasing percentage of
the store's inventory is acquired through an appraisal process in which CarMax
appraises and makes an offer to purchase any properly documented vehicle from
the public. See " -- CarMax Used-Vehicle Operations -- Sourcing." All used
vehicles require some reconditioning prior to being sold at retail. Specialized
reconditioning centers, such as the facility that CarMax operates in Orlando,
Florida, provide additional flexibility, helping to balance work load peaks with
new store openings and seasonal fluctuations. See " -- CarMax Used-Vehicle
Operations -- Reconditioning."
Shortly before a store opens, CarMax initiates its distinctive marketing
program using television and radio advertising to establish brand name
recognition. Upon opening, CarMax supplements its television and radio
advertising with a major newspaper campaign. These frequent print advertisements
generally list every vehicle in the store's inventory, with prices.
Each CarMax store has a location general manager, who oversees all of the
store's operations and personnel, and several department managers who are
responsible for sales, operations and purchasing. The location general manager
and the department managers for a new store are typically hired at least one
year prior to the scheduled store opening date. During the period prior to
opening, these managers participate in a rigorous training program at CarMax
headquarters and the existing stores that rotates them through most key
departments and operations of the business. The new management team arrives at a
store site approximately two to three months prior to the scheduled opening date
and assists in planning for the new store's opening. CarMax believes that its
work environment and incentive compensation programs will enable it to attract
and retain qualified personnel in each market it enters.
EXPANSION OF RETAIL REPAIR SERVICE OPERATIONS
CarMax plans to expand its retail repair service operations commencing in
fiscal 1998 in order to achieve greater future profitability, attract new
customers and further develop customer loyalty. Retail repair service operations
have historically been a substantial source of dealer profitability,
representing approximately 43 percent of dealers' 1995 profits according to
30
<PAGE>
the NADA. Currently, CarMax uses its service facilities to inspect and
recondition used vehicles acquired for resale and to provide existing customers
with limited maintenance and light repair services. As part of the rollout of
used-vehicle stores, CarMax plans to open additional reconditioning centers that
will perform an increasing share of the inspection and reconditioning functions,
thereby freeing up repair facilities at the stores. Under the rollout plan,
CarMax expects that its total in-store service bays will increase from 194
expected at the end of fiscal 1997 to 2,580 expected at the end of fiscal 2002
(based on an average of the annual range for facilities planned to be opened
through fiscal 2002). CarMax is currently operating prototypes for this expanded
service at its Atlanta, Georgia retail locations and is developing systems and
procedures that are designed to offer the retail-repair customer an efficient,
customer-friendly process consistent with the process that CarMax has developed
for its vehicle sales operations.
ADDITION OF NEW-VEHICLE FRANCHISES
CarMax believes that new-vehicle operations present opportunities for
incremental revenues and operational and financial synergies when combined with
used-vehicle operations. CarMax currently operates a Chrysler franchise at one
of its Atlanta, Georgia locations. In less than five months of operation, that
franchise surpassed the annual planning volume established by Chrysler. Based on
its experience to date with the Atlanta location, CarMax believes the addition
of a new-vehicle franchise to a used-vehicle store should provide incremental
revenues and contribute to the store's operating profits (including profits from
vehicle financing but before the allocation of group overhead expenses) during
the first full year of franchise operation. CarMax intends to aggressively
pursue new-car franchises for its new and existing stores both through
acquisition of franchises within the territory of its store operations and
through new grants. CarMax plans to add more than 25 new car franchises to its
used-car operations over the initial phase of its rollout through fiscal 2002.
However, given the relative unavailability of new franchises and the limited
availability of franchises within a suitable radius of its existing and proposed
stores, as well as the uncertain future willingness of manufacturers to approve
these transactions, CarMax cannot assure that it will be able to achieve this
portion of its growth plan. CarMax has received initial indications from several
foreign and domestic manufacturers of their willingness to approve CarMax as a
franchisee. CarMax is continuing to explore opportunities with these
manufacturers, as well as with existing franchised dealerships.
INDUSTRY OVERVIEW
CarMax believes that its business strengths and growth strategies position
it to take advantage of the business opportunities now available in automotive
retailing. Based on NADA data and the "Vehicle Remarketing Directory (1996),"
automotive retailing, with more than $596 billion in 1995 sales, is the largest
consumer retail market in the United States, representing nearly 8 percent of
the U.S. gross domestic product. Used-vehicle sales in 1995 were estimated at
$294 billion, with approximately $232 billion in sales by franchised and
independent dealers and the balance in privately negotiated transactions. In
addition, 1995 retail sales of new vehicles, which are sold exclusively through
franchised dealers, were approximately $302 billion.
During the period from 1991 through 1995, used-vehicle sales grew at a
faster rate and were more profitable to dealers than new-vehicle sales. While
estimates from different sources vary, based on NADA data and the Vehicle
Remarketing Directory, used-vehicle unit sales through franchised dealers,
independent dealers and in privately negotiated transactions grew at an
estimated average annual rate of 8.2 percent during such period. From 1991 to
1994, used-vehicle unit sales grew at an estimated average rate of 9.0 percent
and in 1995 continued to grow at an estimated 5.6 percent. By contrast, after
growing at an average annual rate of 7.0 percent from 1991 through 1994,
new-vehicle unit sales declined 2.1 percent in 1995. Dealerships also typically
offer a range of other services and products, including repair and warranty
work, replacement parts, extended warranty coverage, financing and credit
insurance. In 1995, parts and service represented approximately 12.4 percent of
the average dealership's total sales revenue.
USED-VEHICLE SALES
The market for used-vehicle sales through retail outlets and in privately
negotiated transactions in the United States has increased over the past five
years. CarMax believes that the factors that have led to growth in used-vehicle
sales include the substantial increases in new-vehicle prices, which have
prompted a growing segment of the vehicle-buying population to purchase more
affordable used vehicles, and the greater reliability and durability of used
cars resulting from the production of higher-quality vehicles. The used-vehicle
market is extremely fragmented with approximately 22,750 franchised dealers
accounting for $127 billion in 1995 sales. CarMax believes an even greater
number of independent used-vehicle dealers accounted for $105 billion in 1995
sales. Privately negotiated transactions accounted for the remaining 1995 sales,
estimated at $62 billion. In 1995, the top 100 franchised dealer groups
accounted for less than two percent of used-vehicle sales.
31
<PAGE>
CarMax believes that the size and fragmented nature of the used-vehicle
industry and the historically high rate of customer dissatisfaction with the
traditional used-car sales process are conditions similar to those prevailing in
the consumer electronics retail business in the late 1970s and early 1980s.
Circuit City capitalized on those conditions by introducing its innovative
retailing format that led to a dramatic increase in its market share. CarMax
believes that current conditions in the used-vehicle industry offer similar
opportunities.
NEW-VEHICLE SALES
Over the past several decades, changes have occurred in the new-vehicle
retailing industry that CarMax believes could facilitate an expansion of its
new-vehicle operations. Since 1960, the number of franchised dealers has
declined approximately 35 percent to the current 22,750 level. CarMax believes
that further consolidation of franchised dealers is likely as megadealers
continue to put competitive pressures on undercapitalized dealers, individual
dealership owners reach retirement age and manufacturers continue to press for
greater efficiency in their distribution networks. Notwithstanding this trend,
the industry today remains highly fragmented, with few large dealers. According
to Automotive News, in 1995, the largest 100 dealer groups, each with more than
$140 million in total revenues, accounted for less than 10 percent of revenues
from new-car sales in the U.S. and controlled less than 5 percent of all
franchises.
CARMAX USED-VEHICLE OPERATIONS
VEHICLES
CarMax offers its customers a broad selection of makes and models of used
vehicles, including both domestic and foreign manufactured cars and light
trucks, at competitive prices. The most popular models at CarMax stores include
Toyota Camry, Honda Accord, Ford Taurus, Ford Ranger and Ford Escort. To appeal
to the vast array of consumer preferences and budgets, CarMax offers its used
vehicles under two programs -- the CarMax program and the ValuMax program.
CarMax vehicles generally are one to five years old, with less than 70,000
miles, and most are priced from $9,500 to $21,000. The average CarMax vehicle is
between two and three years old, with 28,000 miles, and is priced at $14,500.
Through the ValuMax program, CarMax sells high-quality vehicles that generally
are more than five years old and/or over 70,000 miles, with most priced in a
range from $4,500 to $10,500. The average ValuMax vehicle is between five and
six years old, with 84,000 miles, and is priced at $7,200. In fiscal 1996,
approximately 96.6 percent of the used vehicles sold by CarMax were under the
CarMax program. CarMax has found in surveys that low prices are the primary
reason most customers buy at CarMax. Most CarMax and ValuMax vehicles are priced
from $500 to $1,000 below NADA average book value. Approximately 80 percent of
all used vehicles sold by CarMax in 1995 were priced between $8,500 and $20,500.
CarMax performs a comprehensive, certified quality inspection of each
vehicle. The CarMax commitment to quality is demonstrated to the customer
through a five-day or 250 mile, money-back guarantee and a free, 30-day
comprehensive warranty. Each CarMax vehicle must pass a comprehensive certified
quality inspection that covers all major and minor mechanical systems and all
safety functions as well as cosmetic criteria. Each ValuMax vehicle must pass a
certified quality inspection covering most major mechanical systems and all
safety functions. For ValuMax, concentration is placed on providing good, basic,
mechanically-sound transportation and, therefore, cosmetic corrections or repair
of convenience and/or luxury items such as electric mirrors, electric antennas,
etc. are generally not performed.
SOURCING
CarMax acquires a significant proportion of its used-vehicle inventory
through its unique appraisal process. Unlike the traditional trade-in process,
trained specialists at each CarMax store evaluate any vehicle that is properly
documented, typically in less than 30 minutes, and make an offer to the owner
that is good for seven days or 250 miles (subject only to the vehicle remaining
in substantially the same condition). CarMax believes that this process enables
it to tap into the private market as a significant additional source for used
vehicles and that vehicles purchased directly from consumers, such as those
acquired through the appraisal process, represent the highest quality used
vehicles available in the market because they have been maintained by their
owners. According to the Vehicle Remarketing Directory, of the estimated 51.7
million used vehicles sold in 1995, approximately 51.5 percent of the units were
sold in privately negotiated transactions, including transactions between
related parties. Because its operating strategy is to build customer confidence
and satisfaction by offering only quality vehicles, CarMax resells at retail
only one-third of the vehicles acquired through the appraisal process. CarMax
sells those vehicles that do not meet its retail standards at its in-store
wholesale auctions, generally at cost.
32
<PAGE>
In addition to the appraisal process, CarMax acquires a significant
proportion of its used-vehicle inventory through auctions. Auction houses
facilitate the purchase and sale of vehicles sourced from dealers, rental and
fleet companies and wholesalers as well as off-lease vehicles, which accounted
for only 2.4 million unit sales in 1995, or 4.1 percent of total used-vehicle
unit sales, according to the "Vehicle Remarketing Directory." Most auctions are
open and can be attended by the entire dealer community; the remainder are
"closed" except to the franchised dealers of specific manufacturers. Mannheim
Auto Auction, Inc., the largest U.S. vehicle auctioneer, reports that
approximately 75 percent of all vehicles it auctioned in 1995 were sold at open
auctions. In addition to attending open auctions, CarMax can attend Chrysler's
closed auctions and purchase used vehicles for resale at the CarMax Chrysler
franchise in Atlanta, Georgia. CarMax regularly buys directly from other
traditional sources as well, including wholesalers, franchised and independent
dealers and fleet owners, such as leasing companies and rental companies.
All used vehicles are evaluated on the basis of their wholesale cost and
cost of reconditioning and, for purchases off-site from traditional sources,
cost of delivery to the reconditioning center and the store. Buyers based at the
stores, supported by regional buyers and headquarters staff, purchase most of
the CarMax inventory. Buyers at both the store and regional level, as well as
headquarters staff, rely on the extensive inventory and sales trend data
available through AutoMation. See
" -- Vehicle Inventory Management" and " -- Automated Systems."
CarMax utilizes an in-house training and mentoring program to develop
employees skilled in the distinctive CarMax approach to evaluating and
purchasing used vehicles. CarMax has found that individuals without prior
experience in automobile wholesaling are the most receptive to the skills and
values imparted by this training. Management believes that development of this
unique training program for buyers has provided CarMax with a competitive
advantage over its existing and potential competitors. All significant
purchasing decisions are made by trained personnel. CarMax uses data from
AutoMation to monitor and evaluate the performance of its buyers on an on-going
basis.
Based on consumer acceptance of the appraisal process at existing CarMax
stores and the experience and success of CarMax to date in acquiring vehicles
from traditional sources, CarMax believes that its sources of used vehicles will
continue to be sufficient to meet current needs and to support planned
expansion.
VEHICLE INVENTORY MANAGEMENT
The Circuit City Group has successfully designed and implemented
computer-based management systems to promote efficiency in inventory management
and improve profitability. See "Automated Systems." Leveraging the Circuit City
expertise in this area, CarMax developed and implemented AutoMation, a
sophisticated, computerized inventory management and point-of-sale system, that
is unique to the automobile retail business. This proprietary system allows
headquarters and store personnel to effectively manage vehicle inventory mix to
reflect local demand at each store and minimize inventory carrying costs. Parts
of the system can also be accessed directly by customers as a key component of
the customer-friendly CarMax shopping process. See " -- Operating
Strategies -- Efficient, Customer-Friendly Sales Process" and " -- Automated
Systems."
From the time CarMax appraises a used vehicle until the vehicle is sold,
all relevant information relating to that vehicle is entered into AutoMation.
This information includes the make, model and features of the vehicle, the
wholesale cost, the nature and cost of the reconditioning services performed,
the retail price, how long the vehicle has been on display and its location on
the lot. The system utilizes vehicle sensors and electronic gates erected around
each parking lot, as well as bar codes placed on each vehicle and on-site
parking place, in order to effectively track both vehicle location and movement
on and off the lot as well as test drives which are identified both by vehicle
and sales consultant. Using this information, and applying sophisticated
statistical modeling techniques, CarMax is able to optimize its inventory mix
and display, anticipate future inventory needs at each store, evaluate sales
consultant performance and refine its vehicle pricing strategy. To make
inventory decisions, CarMax supplements information provided by AutoMation with
data from customer and market surveys and from private and governmental reports
analyzing local, regional and national vehicle-purchasing trends.
The quality of inventory is reevaluated weekly by headquarters personnel
with respect to price, store and lot location and other factors and, if
warranted, appropriate adjustments to those factors are recommended to the
store's purchasing manager. CarMax currently turns its vehicle inventory
approximately nine times each year. Under its strict inventory aging policy,
CarMax disposes of any vehicle that has not been sold at retail within specified
periods. Less than one percent of CarMax's retail inventory is ultimately sold
at wholesale.
33
<PAGE>
RECONDITIONING
A key element of the CarMax operating strategy is to provide customers with
high-quality used vehicles and to reinforce customer confidence in that quality
through the CarMax five-day or 250-mile, money-back guarantee and free, 30-day
comprehensive warranty. To meet this quality commitment, all used vehicles sold
at retail by CarMax are subjected to a comprehensive certified quality
inspection. Based on this quality inspection, CarMax determines the
reconditioning necessary to bring the vehicle up to CarMax retail standards. All
vehicles sold to CarMax retail customers require some reconditioning. Vehicles
requiring more reconditioning than can be performed profitably are sold at
in-store wholesale auctions.
CarMax performs most routine mechanical and minor body repairs itself; for
major mechanical repairs as well as glass replacement and painting, CarMax
currently engages third parties specializing in those services. During the past
year, CarMax has been performing an increasing percentage of reconditioning
services in-house and, based on the cost savings realized, CarMax expects that
trend to continue.
Reconditioning services are currently performed at each store as well as at
a specialized center in Orlando, Florida dedicated to reconditioning vehicles
for sale at stores in the Florida, Georgia and North Carolina markets. To
support its planned rollout of used-vehicle stores, CarMax plans to open
additional reconditioning centers that will perform an increasing share of the
inspection and reconditioning functions. See " -- Growth Strategies -- Rapid
Rollout of Used-Vehicle Stores" and "Service and Parts." CarMax expects to
continue to provide reconditioning services at the stores, primarily for
vehicles acquired at the store locations (such as those acquired through the
appraisal process) or otherwise where the cost of transporting a vehicle to and
from the reconditioning center would exceed the savings to be achieved by
performing such services at a more efficient, specialized facility.
The reconditioning center in Orlando has approximately 40 service bays and
can recondition up to 2,000 vehicles per month. The existing CarMax stores have
a range of 17 to 40 service bays of which 10 to 20 are dedicated to
reconditioning. The stores are currently capable of reconditioning on average
between 500 and 1,000 cars per month. In addition to the extra capacity expected
to be provided by new reconditioning centers, CarMax believes it can create
additional capacity, if needed, at its existing facilities by installing more
service bays, employing more technicians and increasing hours of operation.
SERVICE AND PARTS
CarMax service departments currently perform minor repair services at all
store locations under the CarMax free, 30-day comprehensive warranty on used
vehicles and more extensive warranty service on Chrysler vehicles at the CarMax
new-car franchise in Atlanta, Georgia. CarMax plans to expand its retail repair
service operations, including service performed under CarMax service policies,
and is currently operating prototypes for such expanded service at its Atlanta,
Georgia retail locations. CarMax is developing systems and procedures that are
intended to ensure that the CarMax retail repair service operations are
conducted in the same customer-friendly and efficient manner as the other CarMax
operations. Commencing in fiscal 1998, CarMax intends to offer the expanded
retail repair service to the public at all existing and future store locations.
Expansion of retail repair service will be facilitated by the planned rollout of
additional reconditioning centers that will perform an increasing share of the
inspection and reconditioning functions, freeing up space at the retail stores
for the additional retail repair work. See " -- Growth Strategies -- Rapid
Rollout of Used-Vehicle Stores" and " -- CarMax Used-Vehicle
Operations -- Reconditioning."
CarMax believes that the efficiency of its service operations are enhanced
by its use of lateral support groups in servicing and reconditioning vehicles as
well as by its compensation programs which are designed to increase the
productivity of its service technicians and result in reduced costs and
higher-quality repairs and reconditioning. Each group contains a small number of
service professionals with different skills and levels of experience. The
experienced technicians in the group perform the more complicated repairs with
assistance from the apprentices, who also perform simpler functions on their
own. Rather than paying technicians on an hourly basis, each technician receives
a flat rate for each repair or service performed. CarMax is able to track the
productivity of each technician through AutoMation.
CarMax places special emphasis on attracting, developing and retaining
qualified technicians and believes that its favorable working conditions and
compensation programs allow it to attract and retain highly qualified
technicians in each market it enters. All technicians attend in-house training
programs designed to develop their skills in performing routine repair services
on the diverse makes and models of vehicles sold by CarMax. Technicians at the
CarMax new-car franchise in Atlanta, Georgia also attend manufacturer-sponsored
training programs to stay abreast of current diagnostic, repair and maintenance
techniques for Chrysler-manufactured vehicles. In addition, utilization of
lateral support groups allows for greater on-the-job training opportunities for
new technicians.
34
<PAGE>
The CarMax parts departments currently support both the reconditioning and
warranty service functions of the business. Upon completion of the current test
for expanded retail services, CarMax may consider the promotion of retail sales
of accessories in those expanded operations.
CARMAX NEW-VEHICLE OPERATIONS
CarMax believes that the sources of consumer dissatisfaction associated
with the traditional used-vehicle buying process are similar to those
experienced in new-vehicle purchasing. As a result, CarMax believes that its
approach to used-vehicle sales can be successfully applied to new-vehicle
retailing.
CarMax currently operates a Chrysler franchise at one of its Atlanta,
Georgia locations where it employs the same efficient customer-friendly sales
process as in its used-vehicle operations. It offers new cars with a full range
of related services, at low, "no-haggle" prices and uses AutoMation to provide
complete information to the customer regarding vehicle inventory, as well as
financing and service policy options. Unlike many traditional new-car dealers,
it does not charge processing, administration, application or other "hidden"
fees and does not attempt to sell other options at inflated prices.
CarMax was able to add the Chrysler franchise to one of its existing
used-car operations by expanding the available display space, hiring additional
sales consultants and producing advertising relating specifically to its new
vehicles. The new-vehicle operation has been successful to date, surpassing in
less than five months of operation the annual planning volume established by
Chrysler and permitting CarMax to achieve additional leverage on its store
overhead and other costs. Based upon its experience to date with the Atlanta
location, CarMax believes the addition of a new-vehicle franchise to a used-
vehicle store should provide incremental revenues and contribute to the store's
operating profits (including profits from vehicle financing but before the
allocation of Group overhead expense) during the first full year of franchise
operation. CarMax intends to aggressively pursue new car franchises for its new
and existing stores both through acquisition of franchises within the territory
of its store operations and through new grants. CarMax plans to add more than 25
new car franchises to its used-car operations over the initial phase of its
rollout through fiscal 2002. However, given the relative unavailability of new
franchises and the limited availability of franchises within a suitable radius
of its existing and proposed stores, as well as the uncertain future willingness
of manufacturers to approve these transactions, CarMax cannot assure that it
will be able to achieve this portion of its growth plan. CarMax has received
initial indications from several foreign and domestic manufacturers of their
willingness to approve CarMax as a franchisee. CarMax is continuing to explore
opportunities with these manufacturers, as well as with existing franchised
dealerships.
VEHICLE FINANCING
CarMax provides financing for its customers' vehicle purchases through its
financing unit, FNAC, and also arranges financing through NationsBank, N.A.
("NationsBank") and other third-party lenders. After a customer has selected a
vehicle to purchase, a financing application is submitted electronically through
AutoMation to both FNAC and NationsBank, where computerized systems evaluate the
creditworthiness of the customer. Based upon multiple credit bureau checks,
information provided by the customer and credit standards prescribed by the
lender, CarMax presents qualified customers with financing offers from either
FNAC or NationsBank, or both, typically within less than eight minutes. If the
customer fails to meet the automated standards for expedited credit approval,
the lenders' credit personnel undertake further analysis, following which an
adjustment to the terms of the proposed credit may be made or, in cases of more
serious credit problems, the application may be forwarded to one or more
third-party lenders specializing in sub-prime credit loans. All financings are
typically installment contracts secured by the vehicles financed and generally
require a down payment. Customers are permitted to refinance their loans within
three days of a purchase without incurring any finance or related charges.
FNAC generates income from the financing it provides to CarMax customers
primarily through the sale and servicing of the contract receivables it
originates. In addition, FNAC enables CarMax to make credit decisions based on
overall business considerations and thus helps to ensure the reasonable
availability of credit to support CarMax vehicle sales (while retaining its
prudent credit standards) in the event third-party lenders should curtail credit
availability due to market considerations. CarMax believes that the high quality
of its used vehicles as well as the broad scope of the service polices it sells
reduce default rates on its customers' loans by helping to keep the purchased
vehicles operational. The lower default rates enable CarMax to provide and
arrange financing at competitive rates. CarMax provides financing for
approximately 70 percent of its customers through its prime lenders, with about
half of these prime loans placed by FNAC. Another five to 10 percent of CarMax
used-vehicle financing is provided by third-party sub-prime lenders. The CarMax
arrangements with NationsBank and other third-party lenders provide for payment
of a fee to CarMax at the time of financing provided the loan is not refinanced
within three days. CarMax has no recourse liability on loans arranged with
third-party lenders.
35
<PAGE>
FNAC currently sells contract receivables to Enterprise Funding Corporation
("EFC"), a corporation unaffiliated with the Company, which purchases interests
in contract receivables and similar assets originated by third parties. EFC
finances its purchase of such interests, including its purchase of an undivided
interest in the contract receivables originated by FNAC, primarily through the
issuance of commercial paper. CarMax retains a subordinated undivided interest
in FNAC's receivables to the extent of the excess of the receivables balance
over EFC's investment in the receivables and continues to service the
receivables for a monthly servicing fee. CarMax has no additional liability on
the receivables sold to EFC. CarMax currently expects that the total capacity of
its arrangement with EFC will increase as its business and financing needs grow.
As an alternative to loan financing, CarMax also arranges lease financing
for its new-vehicle customers through Chrysler and NationsBank. CarMax's
arrangements with Chrysler and NationsBank provide for payment of a fee to
CarMax at the time of financing. CarMax plans to offer lease financing for its
used vehicles on a selected basis beginning in fiscal 1998.
CarMax recognizes income from the sale of its contract receivables to EFC
at the time of sale. Participation fees from third-party lenders and lessors are
recognized for financial reporting purposes at the time of sale.
SERVICE POLICY SALES
At the time of a vehicle sale, CarMax offers to sell to the customer either
a primary service policy or, in the case of a new or used vehicle still covered
by the manufacturer's warranty, an extended service policy to supplement the
warranty provided by the manufacturer. The service policies are offered at a
low, fixed price. All service policies sold by CarMax have been custom-designed
to its own specifications and are administered by Virginia Surety Company, Inc.,
a subsidiary of AON Corporation, under a private-label arrangement under which
CarMax receives a fee from the administrator at the time the service policy is
sold. CarMax offers comprehensive bumper-to-bumper service policies called
"MaxCare" on its CarMax vehicles and comprehensive power train service policies
on its ValuMax vehicles.
Repair services under the policies sold by CarMax are currently provided
primarily through a network of preferred dealers, although customers are
permitted to obtain covered services from any source. CarMax believes that the
quality of the services provided by its preferred dealer network, as well as the
broad scope of its service policies, helps promote customer satisfaction and
loyalty and thus increases the likelihood of repeat and referral business. As
part of its planned expansion into retail repair service, CarMax expects that in
fiscal 1998 it will begin performing some of the repair service under those
policies at its own stores. See "Growth Strategies -- Expansion of Retail Repair
Service Operations" and "Service and Parts." CarMax already performs minor
repair work at all store locations under its free, 30-day comprehensive warranty
and more extensive warranty service on Chrysler vehicles at its new car
dealership in Atlanta.
In most states, CarMax retains no liability on the service policies it
sells and thus recognizes all of the income from fees paid by the third-party
administrator at the time of sale. In states where third-party service policy
sales are not permitted by law, CarMax sells its own service policies with
revenue deferred and recognized over the life of the contract based on industry
experience.
AUTOMATED SYSTEMS
CarMax believes that the application of computer-based management
technology to retailing promotes efficiency and profitability and enables the
Group to provide better service to its customers. With a full-time staff of more
than 90 MIS professionals, CarMax has made a commitment to improving its
existing technology and extending the use of technology to all areas of its
business -- used vehicles, new vehicles, and retail repair service, as well as
financial management and accounting systems. Access to Circuit City's technology
resources and experience has been and continue to be important to CarMax. The
first CarMax employee was an MIS associate from Circuit City who led the
AutoMation development effort. Information systems at CarMax are currently
managed by CarMax's new Chief Information Officer and three individuals at the
director level who had an average of seven years' experience with Circuit City
before transferring to CarMax. CarMax supplements these resources with strategic
guidance from Circuit City's Chief Information Officer and key members of the
Company's management information systems team, as well as outside consultants.
CarMax has leveraged Circuit City's experience in automating over 400
retail sites nationwide to develop and implement AutoMation, a proprietary
inventory and point-of-sale system that links the CarMax headquarters with all
of its facilities and provides near real-time data collection and communication
among all parts of its business. AutoMation makes it possible for CarMax
management to collect and analyze information from each store and reconditioning
center to control inventory, analyze sales, refine sales strategies, evaluate
performance and help determine compensation of sales consultants,
36
<PAGE>
technicians, buyers and managers and, ultimately, measure profitability.
AutoMation is also a key component at each step of the CarMax sales process,
providing information to customers about available inventory, financing, service
policies and fees and options, including pricing and terms.
CarMax anticipates that efficiencies generated by its substantial
investment in people, systems and hardware should position it as a low-cost
operator in its industry. CarMax believes that its commitment to the application
of computer-based management technology to retailing represents an important
competitive advantage and plans to make significant increases to its MIS staff.
MARKETING AND ADVERTISING
CarMax marketing strategies are focused on developing general awareness of
the advantages of shopping at CarMax, attracting customers who are already in
the market to purchase a vehicle and targeting specific segments of the market
through special promotions. CarMax marketing strategies are implemented
primarily through newspaper, television and radio advertising. CarMax is able to
realize significant cost savings on advertising by purchasing its advertising
jointly with the Circuit City Group, thus leveraging Circuit City's tremendous
media buying power. In fiscal 1995, the Circuit City Group was one of the
largest purchasers of newspaper advertising and spot television advertising in
the United States. As additional stores are opened in a particular market,
CarMax expects to realize further cost economies as a result of even greater
leveraging of its advertising expenses in the local market area over a larger
number of stores. CarMax utilizes market awareness and customer satisfaction
surveys to help tailor its marketing efforts to the purchasing habits and
preferences of customers in each market area.
Newspaper advertisements are designed to attract persons who have already
decided to purchase a vehicle by showing the variety, depth and low prices of
the CarMax selection in the type of vehicle desired. Such advertisements
typically involve multi-page spreads and are published three times a week. The
innovative approach of CarMax to newspaper advertising includes listing the
price of each vehicle available for sale, thereby facilitating comparison price
shopping by the consumer. CarMax television and radio advertisements are
designed to increase public awareness of the advantages of shopping at CarMax,
including the low, "no-haggle" prices, the broad selection of new and/or quality
used vehicles in a wide range of prices and the customer-friendly service.
CarMax is the sole national auto retailing sponsor of CarTalk(Register mark), a
national radio talk show designed to assist callers with their car repair
problems. CarTalk(Register mark) is currently aired on 372 stations nationwide
on National Public Radio. CarMax also targets specific segments of the
used-vehicle market through special promotions. Such promotions may focus on a
particular type of vehicle (e.g., "Minivan Month") or a particular price point
(e.g., $9,999 or less) for a large number of vehicles. Promotions are closely
coordinated by CarMax marketing staff with the purchasing departments at the
selected locations to ensure that appropriate quantities of the targeted
inventory are purchased and displayed, thus maximizing the benefits of the
promotion.
FACILITIES
CarMax currently operates six stores in Virginia, North Carolina, Georgia
and Florida. All CarMax stores are located in high-visibility, high-traffic
commercial areas. CarMax utilizes three original store prototypes that vary in
display capacity from 400 to 1,200 vehicles depending on local market size,
consumer demand and other factors. The "C" prototype is designed to serve the
most populous trade areas and offers the largest merchandise assortment, with
approximately 82,000 square feet of building space and a display capacity of up
to 1,200 vehicles. The "B" prototype is designed for medium-sized markets, with
approximately 66,000 square feet of building space and a display capacity of up
to 800 vehicles. The "A" prototype is designed to serve primarily smaller
markets and trade areas that are on the fringes of larger metropolitan markets,
with approximately 53,000 square feet of building space and a display capacity
of up to 600 vehicles.
In April 1996, CarMax opened a specialized center in Orlando, Florida
dedicated solely to reconditioning vehicles for sale at stores in the Georgia,
Florida and North Carolina markets. The reconditioning center has approximately
40 service bays and can recondition up to 2,000 cars per month.
37
<PAGE>
The following table summarizes CarMax facilities as of November 30, 1996:
<TABLE>
<CAPTION>
BUILDING SQUARE FOOTAGE
--------------------------------------
DISPLAY CAPACITY SELLING AND
(UNITS) SERVICE AREA OTHER AREA TOTAL
---------------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Atlanta, Georgia (Town Center)........................................ 613 14,758 21,906 36,664
Atlanta, Georgia (Gwinnett)........................................... 1,187 40,451 46,347 86,798
Charlotte, North Carolina............................................. 777 28,920 27,131 56,051
Orlando, Florida...................................................... 684 31,265 27,996 59,261
Raleigh, North Carolina............................................... 600 19,419 20,589 40,008
Richmond, Virginia.................................................... 509 18,299 14,279 32,578
Tampa, Florida (1).................................................... 774 41,498 35,676 77,174
Orlando, Florida Reconditioning Facility.............................. -- 37,000 5,280 42,280
</TABLE>
- ---------------
(1) Under construction and scheduled to open by the end of fiscal 1997.
CarMax currently leases its headquarters, which is located in suburban
Richmond, Virginia, near both the main offices of the Circuit City Group and the
site of the first CarMax retail store.
FRANCHISE AGREEMENT WITH CHRYSLER
CarMax operates a new-car franchise at one of its Atlanta, Georgia stores
under a franchise agreement (the "Franchise Agreement") between Chrysler and the
CarMax Group. The Franchise Agreement provides, among other things, that CarMax
has the right and obligation to sell specified models of new
Chrysler-manufactured vehicles and provide related parts and service solely at
the Atlanta, Georgia location, and that CarMax will not sell or service at that
location any new vehicles not manufactured by Chrysler. The Franchise Agreement
expressly permits CarMax to sell and service used vehicles at this location,
regardless of the manufacturer. The Franchise Agreement also grants CarMax the
non-exclusive right to use and display Chrysler's trademarks, service marks and
designs in the form and manner approved by Chrysler. As is typically the case,
the Franchise Agreement does not guarantee exclusivity within a specified
territory. The Franchise Agreement also imposes requirements on CarMax
concerning such matters as the facilities and equipment for servicing vehicles,
the maintenance of vehicles and parts, and the training of personnel. Compliance
with these requirements is closely monitored by Chrysler. The Franchise
Agreement does not have a specified expiration date, but may be terminated by
CarMax on not less than 30 days written notice for any reason and by Chrysler on
generally not less than 60 days written notice for specified reasons, including
a breach by CarMax of any of its obligations thereunder or if, without
Chrysler's prior approval, the Company ceases to control the subsidiary that
entered into the agreement.
The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the generally unequal
bargaining power between the parties. For example, under the laws of Georgia, a
manufacturer may not terminate a franchise without good cause and may not
arbitrarily withhold approval for a proposed change in ownership unless it
offers to purchase the franchise from the dealer.
COMPETITION
The automotive retailing industry is highly competitive. Consumers
typically have many choices in deciding where to purchase a used or new vehicle,
particularly in the larger markets that CarMax intends to target as part of its
expansion plan. In both the used- and new-vehicle markets, CarMax seeks to
distinguish itself from traditional dealerships through its sales approach and
other innovative operating strategies.
In the used-vehicle market, CarMax competes with franchised dealers,
independent used-car dealers, automobile rental agencies and private parties.
CarMax anticipates that it will also face competition from other used-car stores
that currently employ or may adopt non-traditional selling methods similar to
those used by CarMax. CarMax believes that the principal competitive factors in
used-vehicle sales are the following: price; the ability to offer a wide
selection of vehicles, including the more popular makes and models; the quality
of the vehicles; the location of retail sites; and the degree of customer
satisfaction with the car-buying experience. Other competitive factors include
the ability to offer or arrange customer financing on competitive terms and the
quality and cost of primary and extended warranties. CarMax believes that its
stores are competitive in all of these areas and enjoy certain advantages over
its competitors that employ traditional selling methods. See " -- Operating
Strategies -- Efficient, Customer-Friendly Sales Process."
38
<PAGE>
In the new-vehicle market, CarMax competes with other franchised dealers
offering vehicles produced by the same or other manufacturers, auto brokers and
leasing companies. CarMax believes that the principal competitive factors in
new-vehicle sales are the following: price; dealer sales promotions; the ability
of dealerships to offer a wide selection of the most popular vehicles; the
location of retail sites; and the quality of customer service. CarMax believes
its new-vehicle store in Atlanta, Georgia is competitive in all of these areas;
however, because the franchise was awarded in 1995 and because of the inventory
allocation system utilized by Chrysler under which future allocations are based
on prior sales, the store has not yet reached the inventory levels that CarMax
expects to be available at maturity. Given that the new-vehicle market has
historically been served primarily by dealerships employing traditional
marketing techniques, CarMax believes that its use of innovative selling methods
will create additional competitive factors in which CarMax may have an
advantage. See " -- Operating Strategies -- Efficient, Customer-Friendly Sales
Process."
When arranging or providing financing for its customers' vehicle purchases,
CarMax, through FNAC, competes with a broad range of financial institutions.
CarMax believes that the principal competitive factors in offering financing are
convenience, interest rates and contract terms. CarMax believes that it is
competitive in all of these areas.
In addition to being affected by national competitive trends, the success
of CarMax depends, in part, on regional auto buying trends, local and regional
economic factors and other regional competitive pressures. Currently, CarMax
sells its vehicles in Virginia, North Carolina, Florida and Georgia. Conditions
and competitive pressures, such as aggressive discounting by manufacturers or a
general economic downturn in the region, affecting these markets or new markets
that CarMax enters could adversely affect CarMax, although the automotive retail
industry as a whole might not be affected.
SERVICE MARKS
The marks "CarMax," "CarMax The Auto Superstore," "The New Way to Buy Used
Cars," "MaxCare," "ValuMax" and "AutoMation" are federally registered service
marks of CarMax, and CarMax considers these marks and the accompanying goodwill
and customer recognition to be valuable to its business. CarMax has applied for
or received federal registrations for numerous other service marks routinely
used in its business, including variations of, and designs associated with,
those named above. Such registrations can be kept in force in perpetuity through
continued use of the marks and timely applications for renewal. For a
description of certain legal proceedings related to the CarMax mark, see
" -- Legal Proceedings and Insurance."
GOVERNMENTAL REGULATION
The CarMax operations are subject to ongoing regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. Among other things, these laws require that CarMax obtain a license
in order to establish, operate or relocate a dealership or to operate an
automotive repair facility. These laws also regulate the manner in which CarMax
conducts its business, including its advertising and sales practices.
The financing activities of CarMax with its customers are subject to
federal truth in lending, consumer lending and equal credit opportunity
regulations as well as state and local motor vehicle finance laws, installment
finance laws, usury laws and other installment sales laws. Some states regulate
finance fees that may be paid as a result of vehicle sales.
As with automobile dealerships generally, and service operations in
particular, the CarMax business involves the use, handling and disposal of
hazardous or toxic substances, including motor oil, gasoline, transmission
fluid, solvents, lubricants and other materials. The business also involves the
past and current operation and/or removal of aboveground and underground storage
tanks containing such substances. Accordingly, CarMax is subject to federal,
state and local laws and regulations governing air and water quality and the
handling, storage and disposal of hazardous or toxic substances. CarMax believes
that it does not have any material environmental liabilities and that compliance
with such laws and regulations will not, individually or in the aggregate, have
a material adverse effect on its results of operations or financial condition.
However, environmental laws and regulations are complex and subject to frequent
change. There can be no assurance that compliance with amended, new or more
stringent laws or regulations, stricter interpretations of existing laws or the
future discovery of environmental conditions at current or future locations will
not require additional expenditures by CarMax, or that such expenditures would
not be material.
CarMax believes that it is in substantial compliance with all laws
affecting its business. Possible penalties for violation of any of these laws
include revocation of licenses and imposition of fines. In addition, many laws
may give customers a private cause of action.
39
<PAGE>
EMPLOYEES
On November 30, 1996, CarMax had 1,368 employees, of whom 146 were employed
in store managerial positions, 351 were employed on a commission basis in
non-managerial store sales positions, 595 were employed in non-managerial
purchasing, parts and service positions and the balance were employed in other
administrative and managerial positions. Management of CarMax considers its
relationship with its employees to be good. None of the CarMax employees is
subject to a collective bargaining agreement.
LEGAL PROCEEDINGS AND INSURANCE
By letter dated April 26, 1996, OfficeMax, Inc. accused the Company of
infringing OfficeMax, Inc.'s trademark rights by using the mark CARMAX. The
Company denies such allegations and on May 19, 1996, filed suit in the U.S.
District Court for the Eastern District of Virginia seeking a declaratory
judgment that the Company's use and registration of the mark CARMAX and other
marks containing MAX as a prefix or suffix do not violate any rights of
OfficeMax, Inc. On June 10, 1996, OfficeMax, Inc. filed a counterclaim against
the Company seeking unspecified damages and an order enjoining the Company from
using certain marks, including the mark CARMAX. On October 22, 1996, the Court
granted the Company's motion to file an amended complaint requesting, among
other things, that certain of OfficeMax, Inc.'s marks be cancelled or declared
void. On November 1, 1996, OfficeMax, Inc. filed an amended complaint
requesting, among other things, that certain of the Company's marks be cancelled
or declared void. The Court has severed the parties' amended claims from the
original declaratory judgment suit. A trial on the declaratory judgment suit has
been set for February 12, 1997. Although it is impossible to predict the outcome
of this litigation, the Company believes that it has a valid basis for its
complaint and that OfficeMax, Inc.'s allegations and counterclaims are without
merit.
In addition to the matters described above, CarMax is involved in various
legal proceedings that arise in the normal course of business. Based upon its
evaluation of the information currently available, CarMax believes that the
ultimate resolution of such proceedings will not have a material adverse effect
on the financial position, liquidity or results of operations of CarMax.
CarMax maintains general liability and property insurance and an umbrella
and excess liability policy in amounts it considers adequate and customary for
businesses of its kind. However, there can be no assurance that CarMax will not
experience legal claims in excess of its insurance coverage or claims which are
ultimately not covered by insurance.
40
<PAGE>
MANAGEMENT OF THE CARMAX GROUP
The following table sets forth certain information concerning the
management of the CarMax Group:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard L. Sharp 49 Chairman of the Board, President and Chief Executive Officer of the Company.
Michael T. Chalifoux 49 Senior Vice President, Chief Financial Officer and Secretary of the Company.
W. Austin Ligon 45 President of CarMax and Senior Vice President -- Automotive for the Company.
Mark F. O'Neil 38 Vice President and General Manager of CarMax.
Keith D. Browning 44 Vice President and Chief Financial Officer for CarMax and Vice President of the Company.
Thomas J. Folliard 31 Vice President of Merchandising for CarMax.
Michael K. Dolan 47 Vice President and Chief Information Officer for CarMax.
Fred S. Wilson 47 Assistant Vice President, Loss Prevention for CarMax.
</TABLE>
Mr. Sharp joined the Company as an Executive Vice President in 1982. He
became President of the Company in 1984, Chief Executive Officer in 1986 and
Chairman of the Board in 1994. He is a director of James River Corporation of
Virginia and Flextronics International, Ltd. He has been a director of the
Company since 1983.
Mr. Chalifoux joined the Company in 1983 as Corporate Controller and was
elected Vice President and Chief Financial Officer in 1988. He became Senior
Vice President and Chief Financial Officer in 1990 and Secretary in 1993. He has
been a director of the Company since 1991. He was instrumental in establishing
and expanding both Circuit City's and CarMax's credit operations.
Mr. Ligon joined the Company in 1990 as Vice President of Corporate
Planning and was named Senior Vice President in 1991. Mr. Ligon came to Circuit
City from Marriott Corporation where he was Senior Vice President of Strategic
Planning for Marriott Hotels and Resorts. He joined Marriott in 1984 as Director
of Corporate Planning and Business Development. He also served as Vice President
of Marketing in Marriott's family restaurant division and as Vice President and
General Manager of the Allie's Restaurant Division.
Mr. O'Neil joined the Company in 1992 as Director of Special Projects for
the new automotive division and was promoted to Vice President and General
Manager in 1995. Mr. O'Neil had prior automotive experience with Ertley
Motorworld, a dealer with 19 franchises based in Wilkes-Barre, Pennsylvania,
where he was President and Chief Operating Officer from 1990 to 1992. Mr. O'Neil
had additional automotive experience with BTE/Collision Repair Experts, Inc. in
Philadelphia, Pennsylvania, where he was a General Manager/Partner from 1988 to
1990 and GKN Autobody in Memphis, Tennessee, where he was Director of
Development and Marketing from 1987 to 1988.
Mr. Browning joined the Company in 1982 as Assistant Controller for the
West Coast Division of Circuit City and was the Controller for the division from
1984 to 1987. In 1987 Mr. Browning was appointed Assistant Controller for the
Company and was promoted to Corporate Controller in 1990. Mr. Browning was
promoted to Vice President of the Company in 1995 and joined CarMax in early
1996. Mr. Browning has had extensive experience with the rollout of other
Circuit City business concepts, beginning with the initial Circuit City
Superstore rollout for the West Coast Division. Mr. Browning has been involved
in the development of accounting procedures, systems and internal controls for
CarMax since its inception.
Mr. Folliard joined the CarMax Group in 1993 as the Senior Buyer and became
the Director of Purchasing in 1994. Mr. Folliard was promoted to Vice President
of Merchandising of the CarMax Group in 1996. He is responsible for the
purchasing functions of the Group and has been instrumental in the design and
development of the buyer training program and in-store wholesale auction
process. Mr. Folliard's prior experience was with Jim Rathman Chevrolet/Cadillac
in Melbourne, Florida in auto wholesaling from 1989 to 1993 where he was a
member of one of the largest wholesale-buying groups in the southeastern U.S..
Mr. Dolan joined the CarMax Group in 1997 as Vice President and Chief
Information Officer. Mr. Dolan had prior management information systems
experience with H.E.B. Stores, a privately held company that is a fast-growing
grocery retailer, where he was vice president and chief information officer.
Prior to joining H.E.B. Stores in 1985, Mr. Dolan had management information
systems experience with Vons Companies, Blue Cross of Southern California,
California Federal Bank and Carnation, Inc.
Mr. Wilson joined the Company in 1990 as Director of Loss Prevention and
was promoted to Assistant Vice President, Loss Prevention in 1993. Mr. Wilson
has several years "big-ticket" retail experience as well as several years of
high-volume retail experience. Mr. Wilson joined CarMax in August of 1996.
41
<PAGE>
CARMAX GROUP SELECTED HISTORICAL FINANCIAL DATA
The selected financial data presented below as of November 30, 1996, and
for the nine months ended November 30, 1996 and 1995 were derived from the
CarMax Group's unaudited interim Financial Statements set forth herein, which
include all adjustments, consisting of normal recurring accruals, that the
Company considers necessary to present fairly such data for an interim period.
Interim operating results are not necessarily indicative of the results that may
be expected for a full year. The selected financial data presented below as of
February 29, 1996, and for each of the years in the three-year period ended
February 29, 1996, were derived from the CarMax Group's Financial Statements set
forth herein, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The selected financial data should be read in conjunction with the
CarMax Group's Financial Statements, the CarMax Group's unaudited interim
Financial Statements, and the information in "CarMax Group Management's
Discussion and Analysis of Results of Operations and Financial Condition" set
forth herein, as well as the Company's Consolidated Financial Statements, the
Company's unaudited interim Consolidated Financial Statements, and the
information in "Company Management's Discussion and Analysis of Results of
Operations and Financial Condition" set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
----------------- ------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN MILLIONS)
RESULTS OF OPERATIONS
Net sales and operating revenues...................... $375 $203 $276 $ 77 $ 16
Cost of sales......................................... 344 186 252 72 14
---- ---- ---- ---- ----
Gross profit....................................... 31 17 24 5 2
---- ---- ---- ---- ----
Selling, general and administrative expenses.......... 35 21 29 11 5
Interest expense...................................... 4 3 4 1 --
---- ---- ---- ---- ----
Total expenses........................................ 39 24 33 12 5
---- ---- ---- ---- ----
Loss before income tax benefit..................... 8 7 9 7 3
Income tax benefit.................................... 3 3 4 3 1
---- ---- ---- ---- ----
Net loss........................................... $ 5 $ 4 $ 5 $ 4 $ 2
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
AS AS
OF OF
NOVEMBER FEBRUARY
30, 1996 29, 1996
---- ----
<S> <C> <C>
BALANCE SHEET DATA
Working capital....................................... $(18) $ 47
Total assets.......................................... 184 103
Total debt............................................ 172 97
Accumulated group deficit............................. 16 11
</TABLE>
42
<PAGE>
CARMAX GROUP MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The CarMax Group began operations with one store in Richmond, Virginia, in
October of the fiscal year ended February 28, 1994. As of November 30, 1996, the
Group operated six retail locations. Three different store formats, which vary
in acreage, vehicle assortment and facility square footage allow the Group to
tailor its operations to the populations and volume expectations for specific
trade areas. The "C" store in operation today covers 30 acres with room to
display up to 1,200 vehicles and includes an 86,000 square foot showroom,
reconditioning and service facility. The two "B" format stores average 20 acres,
have room to display up to 700 vehicles and include facilities that average
58,000 square feet. The three "A" format stores average 12 acres, have room for
up to 600 vehicles and include facilities that average 36,000 square feet.
Early in the current fiscal year at the Group's used car "C" store location
in Atlanta, Georgia, CarMax began selling new Chrysler, Plymouth, Jeep and Eagle
vehicles under the terms of a franchise agreement with Chrysler Corporation.
The table below details CarMax retail units:
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28 OR 29
--------------- ----------------------------
1996 1995 1996 1995 1994
---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
"C" Store...................................................... 1 1 1 -- --
"B" Store...................................................... 2 -- -- -- --
"A" Store...................................................... 3 3 3 2 1
-
------ ------ ------ ------
Total.......................................................... 6 4 4 2 1
-
-
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
RESULTS OF OPERATIONS -- FISCAL YEARS 1996, 1995 AND 1994
In order to present historical financial information which represents the
business defined as the CarMax Group, certain reclassifications have been made
to conform the results of operations for all periods presented. The accounts of
the Company's test in wholesaling used cars, which has ceased operation, were
excluded from the CarMax Group's results of operations. As a result, both net
sales and net losses are lower than previously reported amounts.
SALES GROWTH
Total sales increased 258 percent in fiscal 1996, to $275.9 million. In
fiscal 1995 total sales increased 376 percent to $77.0 million from $16.2
million in fiscal 1994. The fiscal 1996 sales growth primarily reflects the
addition of new locations and includes a 12 percent comparable stores sales
increase for one location classified as a comparable store throughout the year
and a second location classified as a comparable store for a portion of the
year. The fiscal 1995 growth includes a 43 percent comparable store sales
increase for one location classified as comparable for a portion of the year.
In most states, CarMax sells service policies on behalf of an unrelated
third-party and has no contractual liability to the customer under the service
policy program. Commission revenue from third-party service policy programs is
recognized immediately. In states where third-party service policy sales are not
permitted by law, CarMax sells its own service policies. Revenues from the
Group's service policies are deferred and recognized over the life of the
contract based on industry experience. As the Group grows, it expects that
third-party sales will constitute the larger percentage of service policy sales.
Gross dollar sales (aggregate consumer's retail purchase price) from all
service policy programs were 3.8 percent of total sales in fiscal 1996 compared
to 3.3 percent and 3.5 percent in fiscal 1995 and 1994, respectively. Total
service policy revenue, which is reported in total sales, was 1.4 percent of
total sales in fiscal 1996 compared to 0.5 percent and 0.1 percent in fiscal
1995 and 1994, respectively. Third party service policy revenues were 1.3
percent of total sales in fiscal 1996 compared to 0.4 percent in fiscal 1995.
IMPACT OF INFLATION. Management expects that increases in vehicle pricing
would have a positive impact on CarMax's sales and earnings. However, increased
interest rates, including rates associated with consumer installment credit,
could have a negative impact on sales and earnings.
GROSS PROFIT
The CarMax marketing concept includes a strong commitment to providing a
high level of consumer value. The CarMax strategy is to price vehicles at or
below the best negotiated price in the market. As a result, CarMax operates with
lower gross profit margins than industry averages for used-vehicle dealerships.
The gross profit margin was 8.6 percent in fiscal 1996, 6.3 percent in fiscal
1995 and 12.2 percent in fiscal 1994. Improved inventory management, including
optimizing each store's
43
<PAGE>
vehicle mix and display based on local market demand, contributed to the margin
increase in fiscal 1996. The fiscal 1994 margin reflects results from the
Group's first location, which operated for the last five months of the fiscal
year. Pricing adjustments made during the early stages of operation reduced the
gross margin from fiscal 1994 to fiscal 1995 but also produced higher per store
sales volumes. Cost of sales includes the cost of vehicles, reconditioning
costs, transportation and other purchasing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
CarMax's consumer value marketing concept produces average store volumes
significantly higher than industry averages. As a result, selling, general and
administrative expenses are expected to be relatively lower as a percentage of
sales. Over the past three years, the expense to sales ratio has declined as
sales from additional locations and comparable store sales growth have leveraged
expenses, including start-up costs and Group overhead expenses. Selling, general
and administrative expenses were 10.3 percent of sales in fiscal 1996, 14.0
percent in fiscal 1995 and 30.0 percent in fiscal 1994.
Operating profits generated by the CarMax Group's installment lending
division, First North American Credit, and fees received for arranging financing
through third parties are recorded as a reduction to selling, general and
administrative expenses.
INTEREST EXPENSE
Interest expense was 1.5 percent of sales in fiscal 1996, 1.4 percent in
fiscal 1995, and 1.0 percent in fiscal 1994. Interest expense is incurred on
allocated debt used primarily for store expansion and inventory and receivables
growth.
INCOME TAXES
The Group's effective income tax rate was 41.5 percent in fiscal 1996, 41.2
percent in fiscal 1995 and 40.8 percent in fiscal 1994. The CarMax Group
generated losses in all reported periods, and as a result has recorded related
income tax benefits. Compared to the Circuit City Group, this Group experienced
relatively higher state income tax rates due to the fact that as members of the
consolidated group for state tax purposes the CarMax Group is subject to income
tax in states in which it presently does not conduct business. The resulting
high tax rate is expected to decline as the Group expands geographically into
additional states.
NET LOSS
Management anticipated that CarMax would produce a loss in its initial
growth stage. The pre-tax loss totaled $8.9 million in fiscal 1996, $7.0 million
in fiscal 1995 and $3.0 million in fiscal 1994. After-tax losses totalled $5.2
million in fiscal 1996, $4.1 million in fiscal 1995 and $1.8 million in fiscal
1994. Although the Group has produced losses as expected, all stores open as of
August 31, 1996, are currently producing an operating profit including profits
from vehicle financing but before the allocation of Group overhead expenses.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Accumulated Group deficits at February 29, 1996, and November 30, 1996,
totalled $11.2 million and $15.7 million, respectively. The Group has funded
such deficits and the expansion of the store base and installment loan portfolio
through a combination of allocated external debt, sale leaseback transactions
and receivables securitizations. The Group continues to work towards obtaining a
cost effective securitization of automobile inventory.
In fiscal 1996, net cash provided by operating activities was $16.1 million
compared with $68.0 million used in operating activities in fiscal 1995 and
$20.0 million used in operating activities in fiscal 1994. The fiscal 1996 cash
increase principally reflects a decrease in net accounts receivable due to the
sale of installment loan receivables through securitizations, as described
below, and a more limited growth of inventory in relation to sales growth. The
increase in cash used in operating activities in fiscal 1995 reflects an
increase in installment loan receivables generated by existing and new stores
and an increase in inventory to support new store openings.
Net cash used in operating activities was $14.1 million for the nine months
ended November 30, 1996, reflecting a use of cash to fund an additional $9.6
million in accounts receivable and $9.3 million in inventory, prepaid expenses
and other current assets, which was partially offset by a $8.0 million increase
in accounts payable, accrued expenses and other current liabilities.
44
<PAGE>
For the nine months ended November 30, 1995, the $32.4 million cash
provided by operating activities was largely the result of a $27.4 million
decrease in accounts receivable from an initial securitization transaction and a
$5.3 million decrease in inventory, prepaid expenses and other current assets.
The auto loan securitization program was started in fiscal 1996 with
securitized receivables totalling $87.0 million at February 29, 1996. At
November 30, 1996, securitized receivables totalled $135.0 million. Under the
securitization program, receivables are sold to an unaffiliated third party with
the servicing benefit retained. The Group expects that the existing
securitization programs can be increased to accommodate receivables growth as
CarMax grows.
The CarMax Group's capital expenditures were $26.8 million in fiscal 1996,
$33.0 million in fiscal 1995 and $7.3 million in fiscal 1994. The Group
anticipates capital expenditures for fiscal 1997 to aggregate approximately $185
million. Capital expenditures for the first nine months of fiscal 1997 were
$60.5 million. Most of CarMax's capital expenditures through the third quarter
of fiscal 1997 related to the opening of its six existing stores, its
reconditioning center and stores scheduled to open over the following 12 months.
Capital expenditures for the balance of fiscal 1997 will consist primarily of
expenditures for the remaining fiscal 1997 store opening and store openings in
fiscal 1998.
The Group relies on the Company's allocated external debt to fund operating
deficits and to provide working capital needed to fund net assets not otherwise
disposed of through sale-leasebacks or receivable securitizations. All
significant financial activities of the Group are managed by the Company on a
centralized basis and are dependent on the financial condition of the Company.
Such financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate.
The Company anticipates that the proceeds of the CarMax Stock Proposal,
proceeds from the sales of property and equipment and receivables, and increases
in the Company's debt allocated to the CarMax Group, together with cash
generated by operations, will be sufficient to fund CarMax Group's capital
expenditures and operations through the expansion period.
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF FISCAL 1997 VERSUS FIRST NINE
MONTHS OF FISCAL 1996
SALES GROWTH
Total sales rose 57 percent for the quarter ended November 30, 1996, to
$118.4 million from $75.5 million in last year's third quarter. Comparable store
sales increased 22 percent for the third quarter of fiscal 1997. Total sales
increased 85 percent to $375.3 million in the first nine months of fiscal 1997
compared to $203.1 million in the first nine months of fiscal 1996. Comparable
store sales increased 21 percent for the first nine months of fiscal 1997. The
sales growth primarily reflects the addition of new stores, and the addition of
the Chrysler new-car franchise at one of the Atlanta, Georgia, stores.
Gross dollar sales from all service policies were 3.5 percent of total
sales in the first nine months of fiscal 1997 compared with 3.8 percent in the
first nine months of fiscal 1996. The decline in service policy revenues
reflects the addition of the Chrysler franchise, where manufacturer's warranty
coverage results in lower penetration. Total service policy revenues, which are
reported in total sales, were 1.2 percent of total sales in the first nine
months of fiscal 1997 compared to 1.4 percent in the first nine months of fiscal
1996. Third-party service policy revenues were 1.1 percent of total sales in the
first nine months of fiscal 1997 compared to 1.3 percent in the first nine
months of fiscal 1996.
SEASONALITY
CarMax Group sales are subject to seasonal influences. Generally the Group
experiences more of its net sales in the first half of the fiscal year.
Therefore, interim results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
GROSS PROFIT
The gross profit margin decreased to 7.0 percent of sales in the third
quarter of fiscal 1997 from 7.6 percent for the same period of fiscal 1996.
Gross profit as a percentage of sales was 8.4 percent in the first nine months
of fiscal 1997 compared to 8.5 percent for the first nine months of fiscal 1996.
The decrease in the gross profit margin reflected the addition to the sales mix
of new-car sales generated by the Chrysler franchise. Due to the seasonal nature
of the business, gross margins are typically lower in the third quarter.
45
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Additional overhead to support the first phase in the Group's national roll
out increased the expense ratio for the third quarter to 11.0 percent of sales
this year from 10.3 percent in the same period last year. However, the expense
ratio decreased as a percentage of sales to 9.3 percent of sales in the first
nine months of fiscal 1997 compared to 10.3 percent of sales in the first nine
months of fiscal 1996. This decrease was primarily attributable to an increase
in FNAC's servicing revenue, comparable store sales growth and increased sales
from new stores and the addition of the Chrysler franchise.
INTEREST EXPENSE
Interest expense was 1.6 percent of sales for the third quarter of fiscal
1997 compared with 1.4 percent for the third quarter of fiscal 1996. Interest
expense was 1.1 percent of sales in the first nine months of fiscal 1997
compared to 1.5 percent of sales in the first nine months of fiscal 1996. The
decrease in interest expense as a percentage of sales for the nine-month period
reflects the securitization of the Group's installment receivables and the
improved level of inventory per store.
INCOME TAXES
The Group's effective tax rate was 41.5 percent for the third quarter of
fiscal 1997 compared with 41.9 percent for the same period last year. The
effective tax rate was 41.5 percent for the nine month periods ended November
30, 1996, and November 30, 1995.
NET LOSS
The Group's net loss for the third quarter of fiscal 1997 was $3.9 million
compared with a loss of $1.8 million for the third quarter of fiscal 1996. The
net loss for the first nine months of fiscal 1997 was $4.5 million compared with
a loss of $3.9 million for the first nine months of fiscal 1996. The higher net
losses were a result of increased costs from acceleration of Group overhead and
other infrastructure to support its accelerated roll-out plan.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and shall be
applied prospectively. The Group does not expect the standard to have a material
impact on the Group's financial position or results of operations.
OPERATIONS OUTLOOK
The CarMax Group expects to enter 45 of the nation's top 50 markets,
reaching a total store count of 80 to 90 locations by fiscal 2002. The expansion
plans include one additional store in the current fiscal year, eight to 10
stores next fiscal year and 15 to 20 openings per year thereafter. The Group
also will continue to explore opportunities in new-car retailing. In less than
five months of operation, the Chrysler franchise location surpassed the annual
planning volume established by Chrysler. As a result, the Group intends to
pursue new car franchises by acquisition of existing franchises and franchise
grants from automobile manufacturers. The Group currently provides a full range
of repair service on all new vehicles and limited service on used vehicles. The
Group plans on expanding its retail repair service offering in all of its
locations during fiscal 1998.
CarMax expects to produce a higher loss in fiscal 1997 versus fiscal 1996
due to the increased costs from acceleration of Group overhead and other
infrastructure to support its accelerated roll-out plan as well as adjustments
to existing locations to incorporate operating enhancements. The loss for the
fourth quarter of fiscal 1997 is expected to be similar to that of the third
quarter of fiscal 1997. The Group expects to generate results in fiscal 1998
similar to those in fiscal 1997 and to generate profits by fiscal year 1999.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains forward-looking statements
regarding the CarMax Group. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed under "Risk Factors"
and in the Company's 1996 Annual Report on Form 10-K. See "Cautionary Statement
Regarding Forward-Looking Statements."
46
<PAGE>
CERTAIN MANAGEMENT AND ALLOCATION POLICIES
The Company will prepare financial statements in accordance with generally
accepted accounting principles, consistently applied, for both the CarMax Group
and the Circuit City Group, and these financial statements, taken together, will
comprise all of the accounts included in the corresponding consolidated
financial statements of the Company. The financial statements of each of the
Groups principally reflect the financial position, results of operations and
cash flows of the businesses included therein. Consistent with the Amended
Articles and relevant policies, such Group financial statements also will
include allocated portions of the Company's corporate general and administrative
costs and other shared services. Notwithstanding such allocations for the
purpose of preparing each of the Group's financial statements, holders of CarMax
Stock and Circuit City Stock will continue to be subject to all of the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. See "Risk Factors -- Shareholders of One Company; Financial
Effects on One Group Could Affect the Other."
Principal corporate activities will be allocated to the Groups based on
methods that management of the Company believes to be reasonable and will be
reflected in their respective financial statements as follows:
(i) Most financial activities will be managed by the Company on a
centralized basis. Such financial activities include the investment of
surplus cash, the issuance and repayment of short-term and long-term debt
and the issuance and repurchase of any Preferred Stock. In the event that
cash or other property allocated to one Group is transferred to the other
Group (other than transfers made with respect to the Inter-Group Interest
upon the payment of any dividend or other distribution on CarMax Stock),
such transfer will be accounted for in one of the following ways, as
determined by the Board of Directors: (A) as a reallocation of pooled debt
(as defined below) or Preferred Stock, as described in paragraph (ii)
below, (B) as a short-term or long-term loan from one Group to the other
Group, as described in paragraph (iii) below, (C) as an increase or
decrease in the Number of Shares Issuable with Respect to the Inter-Group
Interest, as described in paragraph (iv) below, or (D) as a sale of assets
between the two Groups. There are no specific criteria to determine which
of the foregoing would be applied to a particular transfer of cash or
property from one Group to the other Group. Such determination would be
made by the Board of Directors in the exercise of its business judgment
based upon all relevant circumstances, including the financing needs and
objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general
economic conditions. All transfers of material assets from one Group to the
other Group will be made on a fair value basis for the foregoing purposes,
as determined by the Board of Directors.
(ii) Debt of the Company is either allocated between the Groups
("pooled debt") or is allocated in its entirety to one Group. Preferred
Stock, if issued, will be allocated in a similar manner. Cash allocated to
one Group that is used to repay pooled debt or redeem Preferred Stock will
decrease such Group's allocated portion of the pooled debt or Preferred
Stock, respectively. Cash or other property allocated to one Group that is
transferred to the other Group will, if so determined by the Board of
Directors, decrease the transferring Group's allocated portion of the
pooled debt or Preferred Stock and, correspondingly, increase the recipient
Group's allocated portion of the pooled debt or Preferred Stock. The pooled
debt bears interest at a rate based on the weighted average interest rate
of such debt calculated on a periodic basis and applied to the average
pooled debt balance during the period. Preferred Stock, if issued and if
pooled in a manner similar to the pooled debt, will bear dividends at a
rate based on the weighted average dividend rate of such Preferred Stock
similarly calculated and applied. Any expense related to debt or Preferred
Stock of the Company that is allocated in its entirety to either Group will
be allocated in whole to such Group, and any expense related to increases
in pooled debt or Preferred Stock will be reflected in the weighted average
interest or dividend rate of such pooled debt or Preferred Stock as a
whole.
(iii) Cash or other property allocated to one Group that is
transferred to the other Group, could, if so determined by the Board of
Directors, be accounted for either as a short-term loan or as a long-term
loan. The Board of Directors would establish the terms on which loans
between the Groups would be made, including interest rate, amortization
schedule, maturity and redemption terms.
(iv) Cash or other property allocated to the Circuit City Group that
is contributed as additional equity to the CarMax Group will increase the
Number of Shares Issuable with Respect to the Inter-Group Interest and,
accordingly, will increase the Inter-Group Interest Fraction and decrease
the Outstanding CarMax Fraction. Cash or other property allocated to the
CarMax Group that is transferred to the Circuit City Group would, if so
determined by the Board of Directors, decrease the Number of Shares
Issuable with Respect to the Inter-Group Interest and, accordingly, would
decrease the Inter-Group Interest Fraction and increase the Outstanding
CarMax Fraction.
47
<PAGE>
(v) For the periods prior to the Offering, all financial impacts of
equity offerings have been reflected entirely in the financial statements
of the Circuit City Group. After the Offering, all financial impacts of
issuances of additional shares of CarMax Stock, the proceeds of which are
attributed to the CarMax Group, would be reflected entirely in the
financial statements of the CarMax Group. All financial impacts of
issuances of additional shares of Circuit City Stock or additional shares
of CarMax Stock, the proceeds of which are attributed to the Inter-Group
Interest of the Circuit City Group, would be reflected entirely in the
financial statements of the Circuit City Group. Financial impacts of
dividends or other distributions on, and purchases of, shares of CarMax
Stock or Circuit City Stock will be reflected entirely in the respective
financial statements of the CarMax Group and the Circuit City Group, except
that so long as the Circuit City Group has an Inter-Group Interest, the
Circuit City Group financial statements would be credited, and the CarMax
Group financial statements will be charged, with an amount that is
proportionate to the aggregate amount paid in respect of any such dividend
on, or other distribution with respect to, the CarMax Stock.
(vi) Corporate general and administrative costs and other shared
services are generally allocated to the Groups based upon utilization of
such services by each Group. Where determinations based on utilization
alone are impracticable, other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of the cost
attributable to each Group are used.
(vii) Federal income taxes, which are determined on a consolidated
basis, are allocated to each Group in accordance with the Company's tax
allocation policy and reflected in the financial statements for each Group.
In general, the consolidated tax provision and related tax payments or
refunds are allocated between the Groups, for Group financial statement
purposes, based principally upon the financial income, taxable income,
credits and other amounts directly related to the respective Group. Tax
benefits that cannot be used by the Group generating such attributes, but
can be utilized on a consolidated basis, are allocated to the Group that
generated such benefits. As a result, the allocated Group amounts of taxes
payable or refundable are not necessarily comparable to those that would
have resulted if the Groups had filed separate tax returns. State income
taxes generally are computed on a separate company basis.
The items discussed above have been reflected, to the extent applicable, in
the CarMax Group financial statements and are discussed in Notes to the
financial statements of the CarMax Group.
The above policies may be modified or rescinded, or additional policies may
be adopted, in the sole discretion of the Board of Directors, without approval
of the shareholders, although the Board of Directors has no present plans to do
so. Any determination of the Board of Directors to modify or rescind such
policies, or to adopt additional policies, including any such decision that
would have disparate effects upon holders of the two series of Common Stock,
would be made by the Board of Directors in its good faith business judgment of
the Company's best interests, taking into consideration the interests of all
common shareholders. See "Risk Factors -- Factors Relating to the CarMax
Stock -- Fiduciary Duties of the Board of Directors; No Definitive Precedent
Under Virginia Law."
48
<PAGE>
COMPANY SELECTED HISTORICAL FINANCIAL DATA
The selected consolidated financial data presented below as of November 30,
1996, and for the nine months ended November 30, 1996 and 1995 were derived from
the Company's unaudited interim Consolidated Financial Statements, which include
all adjustments, consisting of normal recurring accruals, that the Company
considers necessary to present fairly such data for an interim period. Interim
operating results are not necessarily indicative of the results that may be
expected for a full year. The selected consolidated financial data presented
below as of February 29, 1996, and for each of the years in the five-year period
ended February 29, 1996, were derived from the Company's Consolidated Financial
Statements, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements, the Company's unaudited
interim Consolidated Financial Statements, and the information in the Company's
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" set forth herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
NOVEMBER 30, FEBRUARY 29 OR 28,
------------------- ----------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN MILLIONS, EXCEPT
PER SHARE DATA)
RESULTS OF OPERATIONS
Net sales and operating
revenues..................... $5,246 $4,776 $7,029 $5,583 $4,131 $3,270 $2,790
Cost of sales, buying and
warehousing.................. 4,065 3,683 5,394 4,198 3,025 2,346 1,981
------ ------ ------ ------ ------ ------ ------
Gross profit.............. 1,181 1,093 1,635 1,385 1,106 924 809
------ ------ ------ ------ ------ ------ ------
Selling, general and
administrative expenses...... 1,051 921 1,323 1,106 892 745 676
Interest expense............... 20 17 25 10 5 4 9
------ ------ ------ ------ ------ ------ ------
Total expenses................. 1,071 938 1,348 1,116 897 749 685
------ ------ ------ ------ ------ ------ ------
Earnings before income
taxes................... 110 155 287 269 209 175 124
Provision for income taxes..... 42 58 108 101 77 65 46
------ ------ ------ ------ ------ ------ ------
Net earnings.............. $ 68 $ 97 $ 179 $ 168 $ 132 $ 110 $ 78
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Weighted average shares
outstanding (a)......... 99 99 99 97 97 96 95
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Net earnings
per share (a)........... $ .69 $ .99 $ 1.82 $ 1.72 $ 1.36 $ 1.15 $ .82
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
NOVEMBER FEBRUARY
30, 1996 29, 1996
------ ------
<S> <C> <C>
BALANCE SHEET DATA
Working capital................................... $ 836 $ 905
Total assets...................................... 3,334 2,526
Total debt........................................ 1,025 493
Total stockholders' equity........................ 1,132 1,064
</TABLE>
- ---------------
(a) Following the Offering, the existing common stock will no longer be
outstanding and the Company will no longer report net earnings per share for
the Company on a consolidated basis, but instead will report net
earnings/loss per share for the Circuit City Stock and the CarMax Stock. See
"Summary -- CarMax Group Summary Pro Forma and Historical Financial Data."
49
<PAGE>
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our objective is to manage Circuit City's resources to create maximum
long-term value for the Company's shareholders. We achieve this objective by
adhering to the following policies:
1) We manage our existing business, primarily the current Superstore
markets, to produce the highest possible long-term returns.
2) We make new investments that we believe will increase our earnings and
produce returns above our cost of capital.
The results generated by current operations and by the Company's fiscal
1996 investments are reviewed below.
RESULTS OF OPERATIONS -- FISCAL YEARS 1996, 1995 AND 1994
SALES GROWTH
Total sales increased 26 percent in fiscal 1996, to $7.03 billion. In
fiscal 1995, total sales were $5.58 billion, a 35 percent increase from $4.13
billion in fiscal 1994.
PERCENTAGE SALES CHANGE FROM PRIOR YEAR
<TABLE>
<CAPTION>
CIRCUIT CITY
---------------------
ALL COMPARABLE INDUSTRY
FISCAL STORES STORES SALES*
- ------------------------------------------------------------------------------------------ ------ ---------- --------
<S> <C> <C> <C>
1996...................................................................................... 26% 5% 6%
1995...................................................................................... 35% 15% 11%
1994...................................................................................... 26% 8% 7%
1993...................................................................................... 17% 7% 7%
1992...................................................................................... 18% 1% 0%
</TABLE>
- ---------------
* THE INDUSTRY SALES RATES ARE DERIVED FROM ELECTRONIC INDUSTRIES ASSOCIATION,
ASSOCIATION OF HOME APPLIANCE MANUFACTURERS, RECORDING INDUSTRY ASSOCIATION OF
AMERICA AND COMPANY ESTIMATES OF AUDIO, VIDEO, HOME OFFICE,
TELECOMMUNICATIONS, APPLIANCE AND MUSIC SOFTWARE SALES. MUSIC SOFTWARE IS NOT
INCLUDED IN INDUSTRY SALES PRIOR TO FISCAL 1995. IN THOSE YEARS, CIRCUIT CITY
WAS NOT A SIGNIFICANT PARTICIPANT IN THIS CATEGORY.
CIRCUIT CITY OPERATIONS. Circuit City's total sales growth primarily
reflects continued expansion of the Superstore base and strong comparable store
sales growth from Circuit City operations during most of the last three years.
In fiscal 1996, the Company opened a net of 66 Superstores compared with 59
Superstores in the previous fiscal year. Twelve of the fiscal 1996 stores opened
in the last month of the year. The Company entered the following major
metropolitan markets: Buffalo, N.Y.; Denver, Colo.; Hartford, Conn.; Milwaukee,
Wisc.; Rochester, N.Y.; Salt Lake City, Utah; and Springfield, Mass. The Company
also opened stores in smaller markets, added stores to existing markets and
replaced or expanded 15 stores.
The Company operates four Circuit City Superstore formats with square
footage and merchandise assortments tailored to population and volume
expectations for specific trade areas. With these formats, the Company can
penetrate virtually every market in the U.S. The "D" format was developed in
fiscal 1995 to serve the most populous trade areas. Selling space in the "D"
format averages about 23,000 square feet with total square footage averaging
42,242. The "D" stores offer the largest merchandise assortment of all the
formats. The "C" format constitutes the largest percent of the store base.
Selling square footage in this format has been increased during the last several
years, and new "C" stores typically have about 17,000 square feet of selling
space. Total square footage for all "C" stores averages 33,828. The "B" format
often is located in smaller markets or in trade areas that are on the fringes of
larger metropolitan markets. Selling space in these stores averages
approximately 11,000 square feet with an average total square footage of 24,685.
The "B" stores offer a broad merchandise assortment that maximizes return on
investment in these lower volume areas. The "A" format serves the least
populated trade areas. Selling space averages approximately 9,000 square feet,
and total square footage averages 18,026. The "A" stores feature a layout,
staffing levels and merchandise assortment that creates high productivity in the
smallest markets.
The Company also operates 36 mall-based Circuit City Express stores. These
stores are located in regional malls, are approximately 2,000 to 3,000 square
feet in size and sell small, gift-oriented items. During fiscal 1996, the
Company opened five Circuit City Express stores and closed four stores located
in underperforming malls.
50
<PAGE>
STORE MIX
<TABLE>
<CAPTION>
RETAIL UNITS AT YEAR END
----------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1996 1995 1994 1993 1992
- ------------------------------------------------------------------ ---- ---- ---- ---- ----
SUPERSTORE
"D" Superstore.................................................. 61 12 -- -- --
"C" Superstore.................................................. 259 257 219 188 170
"B" Superstore.................................................. 46 37 30 24 11
"A" Superstore.................................................. 12 6 4 2 2
Electronics-Only.................................................. 5 5 7 7 11
Circuit City Express.............................................. 36 35 34 39 34
---- ---- ---- ---- ----
Total........................................................ 419 352 294 260 228
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
Over the past three years, industry growth in personal computers has driven
strong comparable store sales increases for the Company. During the first half
of fiscal 1996, rapid PC sales growth and relatively strong demand for consumer
electronics and major appliances contributed to a 10 percent comparable store
sales increase. Challenging prior year sales comparisons and softer industry
sales in all categories led to a more modest increase of 1 percent for the
second half and 5 percent for the full year. Based on market research and sales
performance, the Company believes that it continues to maintain substantial
shares in existing markets and to build significant shares in new markets.
For the Company's core retail business, gross dollar sales from all
extended warranty programs were 5.9 percent of sales in fiscal year 1996,
compared with 5.8 percent in both fiscal 1995 and 1994. Total extended warranty
revenue, which is reported in total sales, was 5.1 percent of sales in fiscal
year 1996, 5.4 percent in fiscal year 1995 and 4.8 percent in fiscal year 1994.
The gross profit margins on products sold with extended warranties are higher
than the gross profit margins on products sold without extended warranties. Late
in fiscal 1994, the Company began selling two new extended warranty programs on
behalf of unrelated third parties that issue these plans for merchandise sold by
the Company and other retailers. One of these programs is sold in most major
markets and features in-home service for personal computer products. The second
program covers electronics and major appliances and at year-end was offered by
approximately two-thirds of the Superstores. The remaining stores sell a Circuit
City extended warranty. Under the third-party programs, Circuit City acts as
seller for the unrelated third parties and has no contractual liability to the
customer under the extended warranty plans. Commission revenue from the
third-party extended warranty plans is recognized immediately while revenue from
Circuit City extended warranties is deferred and amortized on a straight-line
basis over the life of the contracts. In fiscal 1996, the increase in
third-party revenue was more than offset by a decrease in revenue recognized
from Circuit City contracts sold in prior periods. The increase in third-party
warranty sales contributed to the growth in total extended warranty revenue from
fiscal 1994 to fiscal 1995. Third-party extended warranty revenue was 3.0
percent of total sales in fiscal 1996, 2.3 percent in fiscal 1995 and 0.7
percent in fiscal 1994. The Company expects third-party extended warranty
revenue to continue increasing in fiscal 1997.
SUPERSTORE SALES PER TOTAL SQUARE FOOT
<TABLE>
<CAPTION>
FISCAL
- ---------------------------------------------------------------------------------------------------
<S> <C>
1996............................................................................................... $ 577
1995............................................................................................... $ 584
1994............................................................................................... $ 523
1993............................................................................................... $ 487
1992............................................................................................... $ 460
</TABLE>
SUPERSTORE SALES PER TOTAL SQUARE FOOT. Over the last five years, the
Company has significantly increased the percentage of store square footage
devoted to selling space. Expanded merchandise assortments and additional
product categories such as personal computers and music software contribute to
higher sales per total square foot in some stores. In fiscal 1995, the total
square footage of new stores began to increase. The larger stores generate high
sales volumes in specific trade areas but have lower sales per total square foot
than smaller Superstores. As a result, the Company's Superstore sales per total
square foot declined in fiscal 1996.
51
<PAGE>
SALES BY MERCHANDISE CATEGORIES*
<TABLE>
<CAPTION>
FISCAL 1996 1995 1994 1993 1992
- --------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
TV....................................................... 17 % 19 % 20 % 23 % 23 %
VCR/Camcorders........................................... 13 % 14 % 17 % 19 % 20 %
Audio.................................................... 19 % 22 % 23 % 23 % 26 %
Home Office.............................................. 26 % 20 % 12 % 7 % 5 %
Appliances............................................... 14 % 15 % 18 % 19 % 19 %
Other.................................................... 11 % 10 % 10 % 9 % 7 %
---- ---- ---- ---- ----
Total............................................... 100 % 100 % 100 % 100 % 100 %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
- ---------------
* IN FISCAL 1996, THE COMPANY MOVED CELLULAR PHONES FROM THE "AUDIO" CATEGORY TO
THE "OTHER" CATEGORY AND MOVED CERTAIN AUDIO PRODUCTS FROM THE "OTHER"
CATEGORY TO THE "AUDIO" CATEGORY. SALES OF THESE PRODUCTS HAVE BEEN
RECLASSIFIED FOR PRIOR YEARS.
SALES BY MERCHANDISE CATEGORIES. Home office products, primarily personal
computers, have increased dramatically as a percentage of the Company's sales
during the past five years. This growth reflects a rapid increase in household
penetration of this product and the strength of Circuit City's consumer offer in
the category. Within the consumer electronics categories, the greatest sales
growth has occurred among the fully featured products such as large-screen
televisions and SurroundSound audio systems. A lack of new product features and
declining retail prices for small-screen televisions and video cassette
recorders have limited sales growth in the video categories. A proliferation of
retail outlets and increased household penetration have reduced cellular phone
sales, which are included in "Other."
IMPACT OF INFLATION. Inflation has not been a significant contributor to
industry growth or to Circuit City's sales growth during the last five years.
The Company expects no significant change in this trend. Because the Company
purchases substantially all products, including consumer electronics, in U.S.
dollars, prices are not directly impacted by the value of the dollar in relation
to other foreign currencies, including the Japanese yen.
CARMAX. During the second half of fiscal 1994, the Company began testing
CarMax: The Auto Superstore, a retail concept that sells used automobiles. The
Company expanded the test to a second location in fiscal 1995 and added two more
locations in fiscal 1996. In January 1996, the Company announced plans to begin
a national rollout of CarMax. CarMax sales totaled $275.9 million in fiscal
1996. CarMax is not included in the reported comparable store sales growth.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin declined to 23.3 percent of sales in fiscal 1996
compared with 24.8 percent in fiscal 1995 and 26.8 percent in fiscal 1994. The
gross profit margin trend reflects growth in personal computer sales, which
produce gross profit margins lower than the Company's average; increased
competition; and a highly promotional climate. The trend also reflects the
addition of CarMax, which generates lower gross margins than the Circuit City
operations, to the sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's lower gross profit margin has been partly offset by
improvements in selling, general and administrative expenses as a percent of
sales. The expense ratio was 18.8 percent of sales in fiscal 1996, 19.8 percent
in fiscal 1995 and 21.6 percent in fiscal 1994. The improvement in the expense
ratio primarily reflects total and comparable store sales growth achieved
throughout the three-year period, an ongoing focus on maximizing store
productivity and productivity of corporate overhead expenditures, a net
contribution from the credit card bank subsidiary and a lower expense structure
for CarMax.
Operating profits generated by the Company's credit card bank subsidiary
are recorded as a reduction to SG&A expenses. Throughout the three-year period,
the subsidiary has benefited from a generally low interest rate environment,
which lowers the bank's cost of funds.
INTEREST EXPENSE
Interest expense increased to 0.4 percent of sales in fiscal 1996, from 0.2
percent in fiscal 1995 and 0.1 percent in fiscal 1994. The increase reflects
higher interest rates, the net addition of $369 million of long-term debt since
fiscal 1994 and higher short-term borrowings resulting from the Company's
growth.
INCOME TAXES
The Company's effective income tax rate was 37.5 percent in both fiscal
1996 and fiscal 1995 and 36.7 percent in fiscal 1994. An increase in the federal
statutory income tax rate in fiscal 1994 required a revaluation of the Company's
deferred tax
52
<PAGE>
asset. That revaluation had a favorable impact on the fiscal 1994 provision for
income taxes and resulted in the lower effective tax rate for that fiscal year.
The higher federal statutory income tax rate increased the Company's effective
tax rate for the latter half of fiscal 1994 and throughout fiscal years 1995 and
1996.
NET EARNINGS
Net earnings rose 7 percent to $179.4 million in fiscal 1996. In fiscal
1995, net earnings were $167.9 million, a 27 percent increase from $132.4
million in fiscal 1994. Net earnings per share rose 6 percent in fiscal 1996, to
$1.82, and 26 percent in fiscal 1995, to $1.72 from $1.36 in fiscal 1994. The
Company's investment in the CarMax concept reduced fiscal 1996 net earnings per
share by 7 cents.
RETURN ON SALES
Return on sales was 2.6 percent in fiscal 1996 compared with 3.0 percent in
fiscal 1995 and 3.2 percent in fiscal 1994.
OPERATIONS OUTLOOK
Looking forward, management believes that continued investment in
Superstore expansion will maximize long-term shareholder value. Management
estimates that in fiscal 1997 the remaining markets suitable for Superstore
expansion will represent $37 billion of the consumer electronics, home office,
major appliance and music software industry's total retail sales potential of
$95 billion. By the year 2000, Circuit City expects to expand the Superstore
base into most of these markets. In fiscal 1997, the Company expects to open an
estimated 60 to 65 Superstores, including approximately 20 "D" stores, 32 "C"
stores, 10 "B" stores and three "A" stores. Approximately 35 of the new
Superstores will open in new markets. The Company also plans to replace
approximately 15 to 20 "B" and "C" stores with larger format stores, to open
additional Circuit City Express stores and to open at least three more CarMax
locations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The standard is effective for fiscal years beginning after December 15, 1995.
The Company does not expect the standard to have a material impact on the
Company's financial position or results of operations. This SFAS will be
implemented for the fiscal year ending February 28, 1997.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company does not intend to adopt the optional new accounting
method of the standard; however, the additional disclosures required by this
SFAS will be made for the fiscal year ending February 28, 1997. The disclosure
requirements of the standard are effective for fiscal years beginning after
December 15, 1995.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. In fiscal 1996, net cash used in operating activities was $55.3
million compared with $47.0 million provided by operating activities in fiscal
1995 and $108.3 million provided by operating activities in fiscal 1994. The
fiscal 1996 decrease principally reflects the limited earnings growth and lower
increases in the provision for deferred income taxes and in accounts payable.
These changes were partly offset by less rapid growth in merchandise inventory,
reflecting lower sales growth expectations at the end of the fiscal year, and in
accounts receivable, which reflects securitization transactions during the year.
The Company funded capital expenditures of $518.2 million in fiscal 1996
primarily with $251.5 million in proceeds from sales of property and equipment
and proceeds from a five-year, $175 million unsecured bank term loan. The
proceeds from sales of property and equipment include $183.9 million from
sale-leaseback transactions, $49.0 million related to landlord reimbursements
for improvements on leased land and $18.6 million from other sources. Capital
expenditures in fiscal 1996 principally reflect Superstores opened during the
year and a portion of the Superstores opening in fiscal 1997. The sale-leaseback
transactions completed in fiscal 1996 are largely related to real estate
purchased in fiscal years 1996 and 1995. The Company expects to complete
additional sale-leaseback transactions in fiscal 1997. Capital expenditures of
$375.4 million in fiscal 1995 and $252.3 million in fiscal 1994 largely were
incurred in connection with the Superstore expansion program. The expenditures
were funded primarily with net cash provided by operating activities,
sale-leaseback arrangements, and landlord reimbursements. In fiscal 1995, the
Company also utilized proceeds from a seven-year, $100 million unsecured bank
term loan.
The Company's credit card bank subsidiary primarily funds its credit card
programs through securitization transactions, which allow the subsidiary to sell
the receivables while retaining a small interest in the receivables. The
Company's credit
53
<PAGE>
card bank subsidiary has a master trust securitization facility for its
private-label credit card that allows the transfer of up to $1.06 billion in
receivables through both private placement and the public market. A second
securitization program allowed, at February 29, 1996, for the transfer of up to
$850 million in receivables related to the subsidiary's bankcard programs. In
fiscal 1996, automobile receivables generated by the Company's installment
lending division were financed with proceeds of $87 million from a
securitization transaction. The Company expects that all securitization programs
can be expanded to accommodate future receivables growth.
As explained in Note 10 to the Consolidated Financial Statements, the
Company has entered into interest rate swap agreements related to the public
issuance of securities by the master trust and the securitization of auto loan
receivables. The interest rate swaps enable the Company to better match funding
costs to the underlying finance charges of the receivables.
CAPITAL STRUCTURE. Total assets at February 29, 1996, were $2.53 billion,
up $522.0 million, or 26 percent since February 28, 1995. The rise in assets
includes increases of $287.4 million in inventory, $181.3 million in net
property and equipment and $59.8 million in net receivables.
The Company has funded expansion with internally generated funds,
sale-leaseback transactions, operating leases and long-term debt. The Company
has funded consumer receivables through securitization transactions. In fiscal
1996, the Company entered into a five-year, $175 million unsecured bank term
loan agreement. As explained in Note 10 to the Consolidated Financial
Statements, the Company has entered into interest rate swap agreements that
effectively convert the loan facility's variable-rate obligation to a fixed-rate
obligation. At February 28, 1995, the Company classified $53 million of
short-term debt as long-term in anticipation of the $175 million loan agreement.
Average short-term debt rose in fiscal 1996 as the Company utilized seasonal
borrowing lines primarily to finance higher inventory needs resulting from more
rapid Superstore expansion and the growth of the CarMax concept. At February 29,
1996, the Company classified $100 million of short-term debt as long-term. The
Company expects to refinance this debt in fiscal 1997 by entering into a
multi-year term loan agreement with a group of banks.
During the period from fiscal 1992 to 1996, stockholders' equity grew
substantially. From fiscal 1995 to 1996, stockholders' equity increased 21
percent to $1.06 billion. Capitalization for the past five years is illustrated
in the "Capitalization" table. Slower earnings growth produced a return on
equity of 18.5 percent in fiscal 1996 compared with 21.1 percent in fiscal 1995.
The fiscal 1996 return was below the Company's long-term objective of 20
percent.
The Company expects to maintain its existing long-term capitalization
strategy in fiscal 1997. Management anticipates that capital expenditures of
approximately $575 million will be funded through a combination of internally
generated funds, sale-leaseback transactions and operating leases and that
securitization transactions will finance the increase in credit card and CarMax
receivables. At the end of fiscal 1996, the Company maintained a multi-year,
$100 million unsecured revolving credit agreement and $255 million in seasonal
lines that are renewed annually with various banks.
CAPITALIZATION
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
FISCAL $ % $ % $ % $ % $ %
- ---------------------------------------- ------- --- ------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
Long-term debt, excluding current
installments.......................... 399.2 23 178.6 14 29.6 3 82.4 9 85.4 12
Other long-term liabilities............. 231.8 14 241.9 19 268.4 27 232.1 26 187.1 26
Total stockholders' equity.............. 1,063.9 63 877.4 67 710.4 70 575.5 65 448.0 62
------- --- ------- --- ------- --- ------- --- ------- ---
Total Capitalization.................... 1,694.9 100 1,297.9 100 1,008.4 100 890.0 100 720.5 100
------- --- ------- --- ------- --- ------- --- ------- ---
------- --- ------- --- ------- --- ------- --- ------- ---
</TABLE>
54
<PAGE>
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF FISCAL 1997 VERSUS FIRST NINE
MONTHS OF FISCAL 1996
NET SALES AND OPERATING REVENUES AND GENERAL COMMENTS
Sales for the third quarter of fiscal 1997 were $1.86 billion, an increase
of 5 percent from $1.78 billion in the same period last year. Sales for the
first nine months of fiscal 1997 were $5.25 billion, an increase of 10 percent
from sales of $4.78 billion in the same period last year. The total sales
increase reflects the continued growth of the Company's Circuit City and CarMax
concepts, partly offset by a Circuit City comparable store sales decrease.
Circuit City comparable store sales increases (decreases) for the third
quarter and first nine months of fiscal years 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
FY'97 3RD QUARTER NINE MONTHS
- -------------------------- ---------------- ----------------
SEPT OCT NOV FY'97 FY'96 FY'97 FY'96
- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
(13%) (9%) (8%) (10%) 3% (7%) 7%
</TABLE>
The third quarter comparable store sales results were below Management's
expectations and reflected the continuation of a challenging industry climate in
which personal computer sales weakened and the consumer electronics sales pace
remained soft. Management expects that comparable store sales will remain soft
as long as industry weakness continues. However, the Company has experienced
comparable store sales growth in major appliances, digital satellite systems and
big-screen televisions. The Company expects to continue producing above-average
results in product segments where its selection and high-service strategy create
significant competitive advantages.
During the quarter, the Company opened 36 new Circuit City Superstores,
including its first three in Pittsburgh, Penn., entries into numerous smaller
markets and additions in existing markets. The Company also replaced or expanded
eight Superstores and opened six mall-based Circuit City Express locations. By
the end of the first nine months, the Company had opened 51 Superstores and
replaced or expanded 16. By fiscal year-end, the Company plans to have opened
approximately 65 Superstores and replaced approximately 20 existing stores.
The table below details Circuit City retail units:
<TABLE>
<CAPTION>
STORES OPEN AT
END OF QUARTER
------------------------------ ESTIMATE
NOV. 30, 1996 NOV. 30, 1995 FEB. 28, 1997
------------- ------------- -------------
<S> <C> <C> <C>
SUPERSTORE
"D" Superstore................................................... 94 52 94
"C" Superstore................................................... 271 260 278
"B" Superstore................................................... 51 43 54
"A" Superstore................................................... 13 11 17
Electronics-Only................................................... 5 5 5
Circuit City Express............................................... 47 37 47
--- --- ---
Total.............................................................. 481 408 495
--- --- ---
--- --- ---
<CAPTION>
FEB. 29, 1996
-------------
<S> <C>
SUPERSTORE
"D" Superstore................................................... 61
"C" Superstore................................................... 259
"B" Superstore................................................... 46
"A" Superstore................................................... 12
Electronics-Only................................................... 5
Circuit City Express............................................... 36
---
Total.............................................................. 419
---
---
</TABLE>
In mid-June, the Company announced a five-year expansion plan for CarMax:
The Auto Superstore(Register mark). The Company began the first phase of its
national roll out of CarMax with the opening of its Orlando, Fla., location on
November 6, 1996. The Company currently operates six CarMax stores. By calendar
year 2001, the Company expects to be operating 80 to 90 CarMax stores. The
Company expects to enter the Tampa, Fla., market before the end of the current
fiscal year. In fiscal 1998, the Company plans to open another eight to 10
CarMax locations and, thereafter, to accelerate the opening program by adding 15
to 20 stores per year.
For the Company's Circuit City business, gross dollar sales from all
extended warranty programs were 6.1 percent of sales in the third quarter of
both fiscal years 1997 and 1996. Third-party warranty revenue rose to 3.7
percent of sales in this year's third quarter from 3.1 percent in the same
period last year. The total extended warranty revenue that is reported in total
sales was 5.2 percent of sales in this year's third quarter versus 5.1 percent
in the third quarter of last year.
55
<PAGE>
Total sales by merchandise categories are listed below:
<TABLE>
<CAPTION>
3RD QUARTER NINE MONTHS
-------------------------- -----------
FISCAL 1997 FISCAL 1996 FISCAL 1997
----------- ----------- -----------
<S> <C> <C> <C>
TV.......................................................................... 20% 19% 18%
VCR/Camcorders.............................................................. 13 13 14
Audio*...................................................................... 17 18 17
Home Office................................................................. 25 28 24
Appliances.................................................................. 15 13 17
Other*...................................................................... 10 9 10
--- --- ---
Total..................................................................... 100% 100% 100%
--- --- ---
--- --- ---
<CAPTION>
FISCAL 1996
-----------
<S> <C>
TV.......................................................................... 17%
VCR/Camcorders.............................................................. 14
Audio*...................................................................... 18
Home Office................................................................. 25
Appliances.................................................................. 16
Other*...................................................................... 10
---
Total..................................................................... 100%
---
---
</TABLE>
- ---------------
* IN THE FOURTH QUARTER OF FISCAL 1996, THE COMPANY MOVED CELLULAR PHONES FROM
THE "AUDIO" CATEGORY TO THE "OTHER" CATEGORY AND MOVED CERTAIN AUDIO PRODUCTS
FROM THE "OTHER" CATEGORY TO THE "AUDIO" CATEGORY. SALES OF THESE PRODUCTS
HAVE BEEN RECLASSIFIED FOR THE PRIOR YEAR QUARTERS.
The Company's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, the Company has realized more of
its net sales and net earnings in the final fiscal quarter, which includes the
Christmas season, than in any other fiscal quarter. The net earnings of any
interim quarter are seasonally disproportionate to net sales since
administrative and certain operating expenses remain relatively constant during
the year. Therefore, interim results should not be relied upon as necessarily
indicative of results for the entire fiscal year.
COST OF SALES, BUYING AND WAREHOUSING
The gross profit margin was 22.7 percent of sales in the third quarter of
both fiscal years 1997 and 1996. The gross margins for the nine months ended
November 30, 1996 and 1995, were 22.5 percent and 22.9 percent, respectively.
A more profitable merchandise mix for Circuit City offset lower gross
margins produced by an intense promotional climate and increased sales from
CarMax. The competitive climate in the electronics business will continue to put
pressure on gross margins, and the increased sales volume from CarMax, which is
a lower gross margin business, is expected to continue reducing consolidated
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expense ratio increased
from 19.4 percent of sales in the third quarter of last year to 20.5 percent for
the same period this year. For the nine-month period ended November 30, 1996,
the expense ratio was 20.0 percent versus 19.3 percent in the same period last
year.
The higher ratio primarily reflects the impact of lower comparable store
sales, partly offset by the increased contribution from the credit card bank
subsidiary and the lower cost structure for CarMax.
INCOME TAXES
The effective income tax rate was 38.0 percent in the third quarter and
first nine months of fiscal 1997 versus 37.5 percent in the same periods last
year. Management expects the effective rate to remain at 38.0 percent in the
fourth quarter.
NET EARNINGS
Net earnings for the quarter ended November 30, 1996, decreased 37 percent
to $19.8 million from $31.5 million in the same period last year. Net earnings
per share declined 38 percent to 20 cents from 32 cents.
Net earnings for the nine months ended November 30, 1996, were $68.2
million, a decrease of 30 percent from $97.3 million in the same period last
year. Net earnings per share decreased 30 percent to 69 cents from 99 cents.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The standard is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and shall be applied
prospectively. The Company does not expect the standard to have a material
impact on financial position or results of operations.
56
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Total assets at November 30, 1996, were $3,333.5 million, up $807.5 million
or 32 percent since February 29, 1996. The largest contributor to the asset
increase was a $563.7 million increase in inventory to support new store
openings and the holiday season sales volume. Net accounts and notes receivable
increased by $113.1 million, primarily due to an increase in credit card
accounts generated by the Company's credit card bank subsidiary. Property and
equipment increased $126.0 million, largely because of planned and completed
store openings.
Accounts payable increased $299.9 million and short-term debt has increased
$501.1 million since the end of fiscal 1996 to support new store expansion and
the purchase of inventory.
The Company's credit card bank subsidiary has a master trust securitization
facility for its private-label credit card that allows the transfer of
receivables through private placement and the public market. During the quarter
ended November 30, 1996, the credit card bank subsidiary issued an additional
$225 million to the public market or to private investors for a total program
capacity of $1.29 billion. The master trust vehicle permits further expansion of
the securitization program to meet future needs. In addition, the Company's
credit card bank subsidiary has an asset securitization program that allows the
transfer of up to $1.45 billion in receivables related to its other bank card
programs. The Company also has an asset securitization program that allows the
transfer of up to $175 million in auto loan receivables. The Company anticipates
that it will be able to expand its securitization programs to meet future needs.
The Company expects to continue its existing long-term capitalization
strategy. Management anticipates that capital expenditures will be funded
through a combination of internally generated funds, sale-leaseback
transactions, operating leases and proceeds of the recent long-term debt
agreement and the Offering and that securitization transactions will be used to
finance the growth in credit card and auto loan receivables. At November 30,
1996, $150 million was drawn on the unsecured revolving bank credit facility and
is included in short-term debt. As of January 9, 1997, the $150 million drawn on
the unsecured revolving bank credit facility had been repaid by the Company. The
Company also maintained $415 million in seasonal lines that are renewed annually
with various banks.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains forward-looking statements
regarding the Company. Factors that could cause actual results to differ
materially include, but are not limited to, those discussed under "Risk Factors"
and in the Company's 1996 Annual Report on Form 10-K. See "Cautionary Statement
Regarding Forward-Looking Statements."
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Amended and Restated Articles of Incorporation (the
"Articles") currently provide that the Company is authorized to issue
252,000,000 shares of stock, consisting of 250,000,000 shares of common stock,
par value $.50 per share, and 2,000,000 shares of Preferred Stock, par value
$20.00 per share, issuable in series by the Board of Directors, of which, as of
December 31, 1996, 500,000 shares were designated as Cumulative Participating
Preferred Stock, Series E (the "Series E Preferred Stock"). As of December 31,
1996, the Company had issued and outstanding 98,008,841 shares of common stock
and no shares of Preferred Stock.
Prior to the delivery of the CarMax Stock in the Offering, the Company will
file with the Virginia State Corporation Commission certain amendments (the
forms of which have been filed as an exhibit to the Registration Statement of
which this Prospectus is a part) to the Articles that will, among other things,
provide for (i) the issuance of the Company's common stock in series and the
Common Stock Redesignation (the "CarMax Stock Proposal Amendments") and (ii) an
increase in the number of shares of common stock authorized for issuance from
250,000,000 to 350,000,000 (such amendment, together with the CarMax Stock
Proposal Amendments, the "Amendments"). The Articles as amended by the
Amendments are referred to herein as the "Amended Articles." Of the Company's
common stock, 175,000,000 shares initially will be designated as CarMax Stock
and 175,000,000 shares initially will be designated as Circuit City Stock. The
Circuit City Stock and the CarMax Stock are referred to herein as the "Common
Stock." The Board of Directors will have the authority to increase or decrease
from time to time the total number of authorized shares comprising each series
of Common Stock but not above a number which, when added to the aggregate number
of authorized shares of all other series of Common Stock, would exceed the total
authorized number of shares of Common Stock, and not below the number of shares
of such series then outstanding.
The authorized but unissued shares of CarMax Stock and Circuit City Stock
would be available for issuance by the Company from time to time, as determined
by the Board of Directors, for any proper corporate purpose, which could include
raising capital, paying stock dividends, providing compensation or benefits to
employees or acquiring other companies or businesses. The approval of the
shareholders of the Company will not be solicited by the Company for the
issuance from the authorized but unissued shares of Common Stock of additional
shares of CarMax Stock or Circuit City Stock (including from shares that were
previously designated as part of the other series but are unissued) unless such
approval is deemed advisable by the Board of Directors or required by stock
exchange regulations or under the VSCA.
The following is a description of the terms of the capital stock of the
Company following the filing of the Amendments with the Virginia State
Corporation Commission. This description does not purport to be complete and is
qualified in its entirety by reference to the Articles and the Amendments.
DIVIDENDS
Dividends on the CarMax Stock and the Circuit City Stock are limited to
legally available assets of the Company under the VSCA and subject to the prior
payment of dividends on any outstanding shares of Preferred Stock. Under the
VSCA, no distribution may be made to shareholders if, after giving effect to
such distribution, the Company would not be able to pay its debts as they become
due in the usual course of business or the Company's total assets would be less
than its total liabilities plus, subject to certain exceptions, any amounts
necessary to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those of the shareholders receiving
the distribution. Assuming the Offering had been completed as of November 30,
1996, the legally available assets of the Company, based on its balance sheet as
of such date, would have been $1.42 billion assuming the over-allotment option
was not exercised, or $1.46 billion assuming that such option was exercised in
full, subject to the Company's ability to continue to pay its debts as they
become due in the usual course of business after having distributed any such
amount.
Dividends on the CarMax Stock and the Circuit City Stock are further
limited to an amount not in excess of the CarMax Group Available Dividend Amount
and the Circuit City Group Available Dividend Amount, respectively. The
Available Dividend Amount with respect to a Group is intended to be similar to
the amount that would be legally available for the payment of dividends on the
stock of such Group under the VSCA if such Group were a separate company. There
can be no assurance that there will be an Available Dividend Amount with respect
to the CarMax Group.
The "CarMax Group Available Dividend Amount," on any date, means the
excess, if any, of:
(i) the product of (x) the Outstanding CarMax Fraction and (y) an
amount equal to the total assets of the CarMax Group less its total
liabilities as of such date determined in accordance with generally
accepted accounting principles as
58
<PAGE>
in effect at such time applied on a basis consistent with that applied in
determining the CarMax Group Net Earnings (Loss), over
(ii) except to the extent that the Amended Articles permit otherwise,
the amount that would be needed to satisfy the preferential rights to which
holders of any Preferred Stock attributed to the CarMax Group are entitled
upon dissolution of the Company;
provided that such excess must be reduced by an amount sufficient to ensure that
the CarMax Group would be able to pay its debts as they become due in the usual
course of business. For the definition of "Outstanding CarMax Fraction," see
" -- Inter-Group Interest."
The "Circuit City Group Available Dividend Amount," on any date, means the
excess, if any, of:
(i) an amount equal to the total assets of the Circuit City Group less
its total liabilities as of such date determined in accordance with
generally accepted accounting principles as in effect at such time applied
on a basis consistent with that applied in determining the Circuit City
Group Net Earnings (Loss), over
(ii) except to the extent that the Amended Articles permit otherwise,
the amount that would be needed to satisfy the preferential rights to which
holders of Preferred Stock attributed to the Circuit City Group are
entitled upon dissolution of the Company;
provided that such excess must be reduced by an amount sufficient to ensure that
the Circuit City Group would be able to pay its debts as they become due in the
usual course of business.
Assuming the Offering and the Common Stock Redesignation had been completed
on November 30, 1996, based on each Group's respective balance sheets as of such
date (and assuming an Outstanding CarMax Fraction of 20% without giving effect
to the CarMax Stock Options), the CarMax Group Available Dividend Amount and the
Circuit City Group Available Dividend Amount at such date would have been $54
million and $1.36 billion respectively, assuming the U.S. Underwriters'
over-allotment option was not exercised, or $62 million and $1.40 billion
million respectively, assuming that such option was exercised in full, subject
in all such cases to the Group's ability to continue to pay its debts as they
become due in the usual course of business after having distributed any such
amount and in each case assuming no exercise of the CarMax Stock Options.
The VSCA limits the amount of distributions on capital stock to the legally
available assets of the Company, which are determined on the basis of the entire
Company, and not just the respective Groups. Consequently, the amount of legally
available assets would reflect the amount of any net losses of any Group, any
distributions on CarMax Stock, Circuit City Stock or any Preferred Stock and any
repurchases of CarMax Stock, Circuit City Stock or certain Preferred Stock.
Dividend payments on the CarMax Stock and on the Circuit City Stock could be
precluded because of the unavailability of legally available assets under the
VSCA, even though the Available Dividend Amount test with respect to the
relevant Group was met.
Subject to the prior payment of dividends on any outstanding shares of
Preferred Stock and the foregoing limitations, the Board of Directors would be
able, in its sole discretion, to declare and pay dividends exclusively on the
CarMax Stock, exclusively on the Circuit City Stock or on both, in equal or
unequal amounts, notwithstanding the relative amounts of the CarMax Group
Available Dividend Amount and the Circuit City Group Available Dividend Amount,
the amount of prior dividends declared on each series, the respective voting or
liquidation rights of each series or any other factor.
"CarMax Group" means, as of any date (i) all businesses, assets and
liabilities of each of CarMax Auto Superstores, Inc., a Virginia corporation,
CarMax, Inc., a Virginia corporation, and C-Max Auto Superstore, Inc., a
California corporation (the "CarMax Group Companies") as of the date of the
first issuance of CarMax Stock; (ii) all assets and liabilities of the Company
and its subsidiaries attributed by the Board of Directors to the CarMax Group,
whether or not such assets or liabilities are or were also assets and
liabilities of any of the CarMax Group Companies; (iii) all properties and
assets transferred to the CarMax Group from the Circuit City Group (other than a
transaction contemplated by clause (iv) below) pursuant to transactions in the
ordinary course of business of both the CarMax Group and the Circuit City Group
or otherwise as the Board of Directors may have directed as permitted by the
Articles; (iv) all properties and assets transferred to the CarMax Group from
the Circuit City Group in connection with an increase in the Number of Shares
Issuable with Respect to the Inter-Group Interest; and (v) the interest of the
Company or any of its subsidiaries in any business or asset acquired and any
liabilities assumed by the Company or any of its subsidiaries outside of the
ordinary course of business and attributed to the CarMax Group by the Board of
Directors as permitted by the Amended Articles; provided, that from and after
any transfer of any assets or properties from the CarMax Group to the Circuit
City Group, the CarMax Group shall no longer include such
59
<PAGE>
assets or properties so contributed or transferred. After the payment date of
any dividend, redemption or other distribution with respect to shares of CarMax
Stock (other than a dividend or other distribution payable in shares of CarMax
Stock or in securities of the Company attributed to the CarMax Group), the
CarMax Group shall no longer include an amount of assets or properties
previously attributed to the CarMax Group of the same kind as so paid in such
dividend or other distribution with respect of shares of CarMax Stock as have a
Fair Value on the record date for such dividend or distribution equal to the
product of (a) the Fair Value on such record date of the aggregate of such
dividend or distribution to holders of shares of CarMax Stock declared
multiplied by (b) a fraction the numerator of which is equal to the Inter-Group
Interest Fraction in effect on the record date for such dividend or distribution
and the denominator of which is equal to the Outstanding CarMax Fraction in
effect on the record date for such dividend or distribution. If the Company pays
a dividend or makes a distribution with respect to shares of CarMax Stock
payable in securities of the Company (other than CarMax Stock), there shall be
excluded from the CarMax Group an interest in the CarMax Group equal to the
product of the number or amount of securities so distributed to holders of
CarMax Stock multiplied by the fraction specified in clause (b) of the preceding
sentence (determined as of the record date for such distribution). To the extent
interest is or dividends are paid on securities so distributed, the CarMax Group
shall no longer include a corresponding ratable amount of the kind of assets
paid as such interest or dividends as would have been paid in respect of the
securities equivalent to such interest in the CarMax Group deemed held by the
Circuit City Group if the securities equivalent to such interest were
outstanding.
"CarMax Group Net Earnings (Loss)," for any period through any date, means
the net income or loss of the CarMax Group for such period (or in respect of the
fiscal periods of the Company commencing prior to the date of the first issuance
of the CarMax Stock, the pro forma net income or loss of the CarMax Group for
such period as if such date had been the first day of such period) determined in
accordance with generally accepted accounting principles as in effect at such
time, reflecting income and expense of the Company attributed to the CarMax
Group on a basis substantially consistent with attributions of income and
expense made in the calculation of the Circuit City Group Net Earnings (Loss),
including, without limitation, corporate administrative costs, net interest and
other financial costs and income taxes.
"Circuit City Group" means, as of any date, (i) the interest of the Company
or any of its subsidiaries on such date in all of the assets, liabilities and
businesses of the Company or any of its subsidiaries (and any successor
companies), other than any assets, liabilities and businesses attributed to the
CarMax Group; (ii) a proportionate undivided interest in each and every
business, asset and liability attributed to the CarMax Group equal to the
Inter-Group Interest Fraction as of such date; (iii) all properties and assets
transferred to the Circuit City Group from the CarMax Group (other than as
contemplated by clause (iv) below) pursuant to transactions in the ordinary
course of business of both the CarMax Group and the Circuit City Group or
otherwise as the Board of Directors may have directed as permitted by the
Amended Articles; (iv) all properties and assets transferred to the Circuit City
Group from the CarMax Group in connection with a reduction of the Number of
Shares Issuable with Respect to the Inter-Group Interest; (v) the interest of
the Company or any of its subsidiaries in any business or asset acquired and any
liabilities assumed by the Company or any of its subsidiaries outside the
ordinary course of business and attributed to the Circuit City Group, as
determined by the Board of Directors; (vi) from and after the payment date of
any dividend, redemption or other distribution with respect to shares of CarMax
Stock (other than a dividend or other distribution payable in shares of CarMax
Stock or in securities of the Company attributed to the CarMax Group), an amount
of assets or properties previously attributed to the CarMax Group of the same
kind as were paid in such dividend or other distribution with respect to shares
of CarMax Stock as have a Fair Value on the record date for such dividend or
distribution equal to the product of (1) the Fair Value on such record date of
the aggregate of such dividend or distribution to holders of shares of CarMax
Stock declared multiplied by (2) a fraction the numerator of which is equal to
the Inter-Group Interest Fraction in effect on the record date for such dividend
or distribution and the denominator of which is equal to the Outstanding CarMax
Fraction in effect on the record date for such dividend or distribution; and
(vii) if the Company pays a dividend or makes a distribution with respect to
shares of the CarMax Stock payable in securities of the Company (other than
CarMax Stock), an interest in the CarMax Group equal to the product of the
number or amount of such securities so distributed to holders of CarMax Stock
multiplied by a fraction the numerator of which is equal to the Inter-Group
Interest Fraction and the denominator of which is equal to the Outstanding
CarMax Fraction (determined as of the record date for such distribution);
provided, that from and after any transfer of any assets or properties from the
Circuit City Group to the CarMax Group, the Circuit City Group shall no longer
include such assets or properties so transferred (other than as contemplated by
clause (ii) above).
"Circuit City Group Net Earnings (Loss)," for any period through any date,
means the net income or loss of the Circuit City Group for such period (or in
respect of fiscal periods of the Company commencing prior to the date of the
first issuance of CarMax Stock, the pro forma net income or loss of the Circuit
City Group for such period as if such date had been the first day of such
period) determined in accordance with generally accepted accounting principles
in effect at such time, reflecting income and expense of the Company attributed
to the Circuit City Group on a basis substantially consistent with attributions
60
<PAGE>
of income and expense made in the calculation of CarMax Group Net Earnings
(Loss), including, without limitation, corporate administrative costs, net
interest and other financial costs and income taxes.
CONVERSION AND REDEMPTION
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF COMMON STOCK
Upon the sale, transfer, assignment or other disposition (whether by
merger, consolidation, sale or contribution of assets or stock or otherwise), in
one transaction or a series of related transactions (a "Disposition"), by the
Company of all or substantially all of the properties and assets attributed to
either Group to one or more persons or entities (other than (w) the Disposition
by the Company of all or substantially all of the Company's properties and
assets in one transaction or a series of related transactions in connection with
the liquidation, dissolution or termination of the Company and the distribution
of assets to shareholders, (x) on a pro rata basis to the holders of all
outstanding shares of the series of Common Stock relating to such Group and, in
the case of a Disposition of the properties and assets attributed to the CarMax
Group, to the Company for the benefit of the Circuit City Group with respect to
the Number of Shares Issuable with Respect to the Inter-Group Interest, if any,
(y) to any person or entity controlled by the Company (as determined by the
Board of Directors) or (z) in connection with a Related Business Transaction),
the Company is required, on or prior to the 85th Trading Day following the
consummation of such Disposition, to either:
(1) provided that there are assets of the Company legally available
therefor:
(i) subject to the limitations described above in the second paragraph
under " -- Dividends," declare and pay a dividend in cash and/or securities
(other than Common Stock) or other property to the holders of outstanding
shares of the series of Common Stock relating to the Group subject to such
Disposition having a Fair Value as of the date of such consummation equal
in the aggregate to (I) in the case of a Disposition of the properties and
assets attributed to the CarMax Group, the product of the Outstanding
CarMax Fraction as of the record date for determining holders entitled to
receive such dividend multiplied by the Fair Value of the Net Proceeds of
such Disposition and (II) in the case of a Disposition of the properties
and assets attributed to the Circuit City Group, the Fair Value of the Net
Proceeds of such Disposition; or
(ii) (A) if such Disposition involves all (not merely substantially
all) of the properties and assets attributed to such Group, redeem all
outstanding shares of Common Stock relating to the Group subject to such
Disposition in exchange for cash and/or securities (other than Common
Stock) or other property having a Fair Value as of the date of such
consummation in the aggregate equal to (I) in the case of a Disposition of
the properties and assets attributed to the CarMax Group, the product of
the Outstanding CarMax Fraction as of such redemption date multiplied by
the Fair Value of the Net Proceeds of such Disposition and (II) in the case
of a Disposition of the properties and assets attributed to the Circuit
City Group, the Fair Value of the Net Proceeds of such Disposition; or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets attributed to such Group, redeem such number of
whole shares of the series of Common Stock relating to the Group subject to
such Disposition (but in any event not more than the number of shares of
such series of Common Stock outstanding) as have in the aggregate an
average Market Value, during the 10-Trading Day period beginning on the
16th Trading Day immediately succeeding such consummation, closest to (I)
in the case of a Disposition of the properties and assets attributed to the
CarMax Group, the product of the Outstanding CarMax Fraction as of the date
such shares are selected for redemption multiplied by the Fair Value of the
Net Proceeds of such Disposition as of the date of such consummation or
(II) in the case of a Disposition of the properties and assets attributed
to the Circuit City Group, the Fair Value of the Net Proceeds of such
Disposition as of the date of such consummation, in either case in
consideration for cash and/or securities (other than Common Stock) or other
property having a Fair Value in the aggregate equal to such Fair Value of
the Net Proceeds or such product, as applicable;
provided, however, that the Company may only redeem shares of a series of
Common Stock pursuant to this paragraph (ii) if the Fair Value of the Net
Proceeds to be paid in redemption of such series is less than or equal to
the Available Dividend Amount with respect to the Group subject to such
Disposition; or
(2) convert each outstanding share of the series of Common Stock relating
to the Group subject to such Disposition into a number of fully paid and
nonassessable shares of the series of Common Stock relating to the other
Group (or, if the Common Stock relating to the other Group is not Publicly
Traded at such time and shares of another class or series of common stock
of the Company (other than the series of Common Stock relating to the Group
subject to such Disposition) are then Publicly Traded, of such other class
or series of common stock as has the largest Market Capitalization as
61
<PAGE>
of the close of business on the Trading Day immediately preceding the date
of the notice of such conversion mailed to holders), equal to 110% of the
ratio (rounded to the nearest five decimal places) of the average Market
Value of one share of Common Stock relating to the Group subject to such
Disposition to the average Market Value of one share of Common Stock
relating to the other Group (or such other class or series of common stock,
as the case may be), during the 10-Trading Day period beginning on the 16th
Trading Day following such consummation.
The Board of Directors may, within one year after a dividend or redemption
described above in this section, convert each outstanding share of the series of
Common Stock relating to the Group subject to such Disposition into a number of
fully paid and nonassessable shares of the series of Common Stock relating to
the other Group (or, if the series of Common Stock relating to the other Group
is not Publicly Traded at such time and shares of another class or series of
common stock of the Company (other than the series of Common Stock relating to
the Group subject to such Disposition) are then Publicly Traded, of such other
class or series of common stock as has the largest Market Capitalization as of
the close of business on the Trading Day immediately preceding the date of the
notice of such conversion mailed to holders) equal to 110% of the Market Value
Ratio of the Circuit City Stock to the CarMax Stock, if the Circuit City Stock
is to be converted into CarMax Stock, or the Market Value Ratio of the CarMax
Stock to the Circuit City Stock, if the CarMax Stock is to be converted into
Circuit City Stock, as of the fifth Trading Day prior to the date of the notice
of such conversion mailed to such holders. Any such exchange would dilute the
interest in the Company of holders of the series of Common Stock relating to the
Group not subject to the Disposition and would preclude holders of both series
of Common Stock from retaining their investment in a security reflecting
separately the business of their respective Group. In determining whether to
effect any such conversion following such a dividend or partial redemption, the
Board of Directors, in its sole discretion and consistent with its fiduciary
duties, in addition to other matters, would likely consider whether the
remaining properties and assets attributed to the Group subject to the
Disposition continue to constitute a viable business. Other considerations could
include the number of shares of Common Stock relating to such Group remaining
issued and outstanding, the per share market price of such Common Stock and the
cost of maintaining shareholder accounts.
The Company may elect to pay the dividend or redemption price referred to
in clause (1)(i) or (1)(ii) of the first paragraph under " -- Mandatory
Dividend, Redemption or Conversion of Common Stock" either in the same form as
the proceeds of the Disposition were received or in any other combination of
cash, securities (other than Common Stock) or other property that the Board of
Directors or, in the case of equity securities or debt securities that have not
been Publicly Traded for a period of at least 15 months, an independent
investment banking firm, determines will have an aggregate market value of not
less than the amount of the Fair Value of the Net Proceeds.
As used herein:
"Convertible Securities" at any time means any securities of the
Company or of any subsidiary thereof (other than shares of the Common
Stock), including warrants and options, outstanding at such time that by
their terms are convertible into or exchangeable or exercisable for or
evidence the right to acquire any shares of either series of the Common
Stock, whether convertible, exchangeable or exercisable at such time or a
later time or only upon the occurrence of certain events, but in respect of
antidilution provisions of such securities only upon the effectiveness
thereof.
"Fair Value" means, (i) in the case of equity securities or debt
securities of a class or series that has previously been Publicly Traded
for a period of at least 15 months, the Market Value thereof (if such
Market Value, as so defined, can be determined); (ii) in the case of an
equity security or debt security that has not been Publicly Traded for at
least 15 months or the Market Value of which cannot be determined, the fair
value per share of stock or per other unit of such security, on a fully
distributed basis, as determined by an independent investment banking firm
experienced in the valuation of securities selected in good faith by the
Board of Directors, or, if no such investment banking firm is, as
determined in the good faith judgment of the Board of Directors, available
to make such determination, in good faith by the Board of Directors; (iii)
in the case of cash denominated in U.S. dollars, the face amount thereof
and in the case of cash denominated in other than U.S. dollars, the face
amount thereof converted into U.S. dollars at the rate published in THE
WALL STREET JOURNAL on the date for the determination of Fair Value or, if
not so published, at such rate as shall be determined in good faith by the
Board of Directors based upon such information as the Board of Directors
shall in good faith determine to be appropriate in accordance with good
business practice; and (iv) in the case of property other than securities
or cash, the "Fair Value" thereof shall be determined in good faith by the
Board of Directors based upon such appraisals or valuation reports of such
independent experts as the Board of Directors shall in good faith determine
to be appropriate in accordance with good business practice. Any such
determination of Fair Value shall be described in a statement filed with
the records of the actions of the Board of Directors.
62
<PAGE>
"Market Capitalization" of any class or series of common stock on any
date means the product of (i) the Market Value of one share of such class
or series of common stock on such date and (ii) the number of shares of
such class or series of common stock outstanding on such date.
"Market Value" of a share of any class or series of capital stock of
the Company on any day means the average of the high and low reported sales
prices regular way of a share of such class or series on such Trading Day
or, in case no such reported sale takes place on such Trading Day, the
average of the reported closing bid and asked prices regular way of a share
of such class or series on such Trading Day, in either case as reported on
the NYSE Composite Tape or, if the shares of such class or series are not
listed or admitted to trading on the NYSE on such Trading Day, on the
principal national securities exchange in the United States on which the
shares of such class or series are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange on such
Trading Day, The Nasdaq National Market System of the Nasdaq Stock Market
("Nasdaq NMS") or, if the shares of such class or series are not listed or
admitted to trading on any national securities exchange or quoted on Nasdaq
NMS on such Trading Day, the average of the closing bid and asked prices of
a share of such class or series in the over-the-counter market on such
Trading Day as furnished by any NYSE member firm selected from time to time
by the Company or, if such closing bid and asked prices are not made
available by any such NYSE member firm on such Trading Day, the Fair Value
of a share of such class or series; PROVIDED, that, for purposes of
determining the market value of a share of any class or series of capital
stock for any period, (i) the "Market Value" of a share of capital stock on
any day prior to any "ex-dividend" date or any similar date occurring
during such period for any dividend or distribution (other than any
dividend or distribution contemplated by clause (ii)(B) of this sentence)
paid or to be paid with respect to such capital stock shall be reduced by
the Fair Value of the per share amount of such dividend or distribution and
(ii) the "Market Value" of any share of capital stock on any day prior to
(A) the effective date of any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of outstanding shares of
such class or series of capital stock occurring during such period or (B)
any "ex-dividend" date or any similar date occurring during such period for
any dividend or distribution with respect to such capital stock to be made
in shares of such class or series of capital stock or Convertible
Securities that are convertible, exchangeable or exercisable for such class
or series of capital stock shall be appropriately adjusted, as determined
by the Board of Directors, to reflect such subdivision, combination,
dividend or distribution.
"Market Value Ratio of the CarMax Stock to the Circuit City Stock" as
of any date means the fraction (which may be greater than 1/1), expressed
as a decimal (rounded to the nearest five decimal places), of a share of
Circuit City Stock (or another class or series of common stock of the
Company, if Circuit City Stock is not then Publicly Traded) to be issued in
respect of a share of CarMax Stock upon a conversion of CarMax Stock into
Circuit City Stock (or another class or series of common stock of the
Company), based on the ratio of the Market Value of a share of CarMax Stock
to the Market Value of a share of Circuit City Stock (or such other common
stock) as of such date, determined by the fraction the numerator of which
shall be the sum of (A) four times the average Market Value of one share of
CarMax Stock over the period of five consecutive Trading Days ending on
such date, (B) three times the average Market Value of one share of CarMax
Stock over the period of five consecutive Trading Days ending on the fifth
Trading Day prior to such date, (C) two times the average Market Value of
one share of CarMax Stock over the period of five consecutive Trading Days
ending on the 10th Trading Day prior to such date and (D) the average
Market Value of one share of CarMax Stock over the period of five
consecutive Trading Days ending on the 15th Trading Day prior to such date
and the denominator of which shall be the sum of (A) four times the average
Market Value of one share of Circuit City Stock (or such other common
stock) over the period of five consecutive Trading Days ending on such
date, (B) three times the average Market Value of one share of Circuit City
Stock (or such other common stock) over the period of five consecutive
Trading Days ending on the fifth Trading Day prior to such date, (C) two
times the average Market Value of one share of Circuit City Stock (or such
other common stock) over the period of five consecutive Trading Days ending
on the 10th Trading Day prior to such date and (D) the average Market Value
of one share of Circuit City Stock (or such other common stock) over the
period of five consecutive Trading Days ending on the 15th Trading Day
prior to such date.
"Market Value Ratio of the Circuit City Stock to the CarMax Stock" as
of any date means the fraction (which may be greater or less than 1/1),
expressed as a decimal (rounded to the nearest five decimal places), of a
share of CarMax Stock (or another class or series of common stock of the
Company, if CarMax Stock is not then Publicly Traded) to be issued in
respect of a share of Circuit City Stock upon a conversion of Circuit City
Stock into CarMax Stock (or another class or series of common stock of the
Company), based on the ratio of the Market Value of a share of Circuit City
Stock to the Market Value of a share of CarMax Stock (or such other common
stock) as of such date, determined by the fraction the numerator of which
shall be the sum of (A) four times the average Market Value of one share of
Circuit City
63
<PAGE>
Stock over the period of five consecutive Trading Days ending on such date,
(B) three times the average Market Value of one share of Circuit City Stock
over the period of five consecutive Trading Days ending on the fifth
Trading Day prior to such date, (C) two times the average Market Value of
one share of Circuit City Stock over the period of five consecutive Trading
Days ending on the 10th Trading Day prior to such date and (D) the average
Market Value of one share of Circuit City Stock over the period of five
consecutive Trading Days ending on the 15th Trading Day prior to such date
and the denominator of which shall be the sum of (A) four times the average
Market Value of one share of CarMax Stock (or such other common stock) over
the period of five consecutive Trading Days ending on such date, (B) three
times the average Market Value of one share of CarMax Stock (or such other
common stock) over the period of five consecutive Trading Days ending on
the fifth Trading Day prior to such date, (C) two times the average Market
Value of one share of CarMax Stock (or such other common stock) over the
period of five consecutive Trading Days ending on the 10th Trading Day
prior to such date and (D) the average Market Value of one share of CarMax
Stock (or such other common stock) over the period of five consecutive
Trading Days ending on the 15th Trading Day prior to such date.
The "Net Proceeds" of a Disposition of any of the properties and
assets attributed to either Group means, as of any date, an amount, if any,
equal to what remains of the gross proceeds of such Disposition after any
payment of, or reasonable provision is made as determined by the Board of
Directors for, (a) any taxes payable by the Company (or which would have
been payable but for the utilization of tax benefits attributable to the
other Group) in respect of such Disposition or in respect of any resulting
dividend or redemption, (b) any transaction costs, including, without
limitation, any legal, investment banking and accounting fees and expenses
and (c) any liabilities (contingent or otherwise) of or attributed to such
Group, including, without limitation, any liabilities for deferred taxes or
any indemnity or guarantee obligations of the Company incurred in
connection with the Disposition or otherwise and any liabilities for future
purchase price adjustments and any preferential amounts plus any
accumulated and unpaid dividends in respect of the Preferred Stock
attributed to such Group.
"Publicly Traded" with respect to any security means (i) registered
under Section 12 of the Securities Exchange Act of 1934, as amended (or any
successor provision of law), and (ii) listed for trading on the NYSE or the
American Stock Exchange (or any national securities exchange registered
under Section 7 of the Securities Exchange Act of 1934, as amended (or any
successor provision of law), that is the successor to either such exchange)
or listed on Nasdaq NMS (or any successor market system).
A "Related Business Transaction" means any Disposition of all or
substantially all of the properties and assets attributed to either Group
in a transaction or series of related transactions that result in the
Company receiving in consideration of such properties and assets primarily
equity securities (including, without limitation, capital stock, debt
securities convertible into or exchangeable for equity securities or
interests in a general or limited partnership or limited liability company,
without regard to the voting power or other management or governance rights
associated therewith) of any entity which (i) acquires such properties or
assets or succeeds (by merger, formation of a joint venture or otherwise)
to the business conducted with such properties or assets or controls such
acquiror or successor and (ii) is primarily engaged or proposes to engage
primarily in one or more businesses similar or complementary to the
businesses conducted by such Group prior to such Disposition, as determined
by the Board of Directors. The purpose of the Related Business Transaction
exception is to enable the Company technically to "dispose" of properties
or assets of a Group to other entities engaged or proposing to engage in
businesses similar or complementary to those of the series of Common Stock
of such Group without resulting in a dividend on, or a conversion or
redemption of, the series of Common Stock of such Group.
"Substantially all of the properties and assets" attributed to either
Group means a portion of such properties and assets (i) that represents at
least 80% of the then Fair Value of the properties and assets attributed to
such Group or (ii) from which were derived at least 80% of the aggregate
revenues for the immediately preceding 12 fiscal quarterly periods of the
Company derived from the properties and assets of such Group as of such
date.
"Trading Day" means each weekday other than any day on which the
relevant series of Common Stock is not traded on any national securities
exchange or quoted in Nasdaq NMS or in the over-the-counter market.
CONVERSION OF COMMON STOCK AT OPTION OF THE COMPANY
The Board of Directors may at any time convert each outstanding share of
CarMax Stock into a number of fully paid and nonassessable shares of Circuit
City Stock (or, if Circuit City Stock is not Publicly Traded at such time and
shares of another class or series of common stock of the Company (other than
CarMax Stock) are then Publicly Traded, of such other
64
<PAGE>
class or series of common stock of the Company as has the largest Market
Capitalization as of the close of business on the Trading Day immediately
preceding the date of the notice of such conversion mailed to holders), equal to
115% of the Market Value Ratio of the CarMax Stock to the Circuit City Stock as
of the fifth Trading Day prior to the date of the notice of such conversion
mailed to such holders.
The Board of Directors may at any time convert each outstanding share of
Circuit City Stock into a number of fully paid and nonassessable shares of
CarMax Stock (or, if CarMax Stock is not Publicly Traded at such time and shares
of another class or series of common stock of the Company (other than Circuit
City Stock) are then Publicly Traded, of such other class or series of common
stock of the Company as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of such
conversion mailed to holders), equal to 115% of the Market Value Ratio of the
Circuit City Stock to the CarMax Stock as of the fifth Trading Day prior to the
date of the notice of such conversion mailed to such holders.
The foregoing provisions allow the Company the flexibility to recapitalize
the Common Stock into one series of common stock that would, after such
recapitalization, represent an equity interest in all of the Company's
businesses. The optional exchange could be exercised at any future time if the
Board of Directors determined that, under the facts and circumstances then
existing, an equity structure consisting of two series of common stock was no
longer in the best interests of all of the Company's shareholders. Such exchange
may be exercised, however, at a time that is disadvantageous to the holders of
one of the series of Common Stock. See "Risk Factors -- Fiduciary Duties of the
Board of Directors; No Definitive Precedent under Virginia Law" and
" -- Potential Diverging Interests."
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
At any time at which all of the assets and liabilities attributed to the
CarMax Group (and no other assets or liabilities of the Company or any
subsidiary thereof) are held directly or indirectly by one or more wholly-owned
subsidiaries of the Company (the "CarMax Group Subsidiaries"), the Board of
Directors may, provided that there are assets of the Company legally available
therefor, redeem all of the outstanding shares of CarMax Stock for a number of
shares of common stock of the CarMax Group Subsidiaries equal to the product of
the Outstanding CarMax Fraction multiplied by the number of shares of the CarMax
Group Subsidiaries to be outstanding immediately following such redemption, on a
pro rata basis. The Company will retain or distribute the balance of the
outstanding shares of the common stock of the CarMax Group Subsidiaries in
respect of the Inter-Group Interest of the Circuit City Group in the CarMax
Group, if any.
At any time at which all of the assets and liabilities attributed to the
Circuit City Group (and no other assets or liabilities of the Company or any
subsidiary thereof) are held directly or indirectly by one or more wholly owned
subsidiaries of the Company (the "Circuit City Group Subsidiaries"), the Board
of Directors may, provided that there are assets of the Company legally
available therefor, redeem all of the outstanding shares of Circuit City Stock
for all of the outstanding shares of the common stock of the Circuit City Group
Subsidiaries, on a pro rata basis. If at the time of any such redemption, the
Circuit City Group holds an Inter-Group Interest in the CarMax Group, the
Company will also issue a number of shares of CarMax Stock equal to the Number
of Shares Issuable with Respect to the Inter-Group Interest either to (i) the
holders of the Circuit City Stock or (ii) one or more of the Circuit City Group
Subsidiaries.
GENERAL CONVERSION AND REDEMPTION PROVISIONS
Not later than the 10th Trading Day following the consummation of a
Disposition referred to above under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company will announce publicly by press release
(i) the Net Proceeds of such Disposition, (ii) the number of shares outstanding
of the series of Common Stock relating to the Group subject to such Disposition,
(iii) the number of shares of such Common Stock into or for which Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof and (iv) in the case of a Disposition of the
properties and assets attributable to the CarMax Group, the Outstanding CarMax
Fraction on the date of such notice. Not earlier than the 26th Trading Day and
not later than the 30th Trading Day following the consummation of such
Disposition, the Company will announce publicly by press release which of the
actions specified in clause (1)(i), (1)(ii)(A), (1)(ii)(B) or (2) of the first
paragraph under " -- Mandatory Dividend, Redemption or Conversion of Common
Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend as described in clause (1)(i)
of such paragraph, the Company is required, not later than the 30th Trading Day
following the consummation of such Disposition, to cause to be given to each
holder of shares of the series of Common Stock relating to the Group subject to
such Disposition and to each holder of Convertible Securities convertible into
or exchangeable or exercisable for shares of such Common Stock (unless alternate
provision for
65
<PAGE>
notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) the record
date for determining holders entitled to receive such dividend, which shall be
not earlier than the 40th Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition, (ii) the anticipated payment
date of such dividend (which will not be more than 85 Trading Days following the
consummation of such Disposition), (iii) the type of property to be paid as such
dividend in respect of outstanding shares of such Common Stock, (iv) the Net
Proceeds of such Disposition, (v) in the case of a Disposition of the properties
and assets attributed to the CarMax Group, the Outstanding CarMax Fraction on
the date of such notice, (vi) the number of outstanding shares of such Common
Stock and the number of shares of such Common Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof and (vii) in
the case of notice to be given to holders of Convertible Securities, a statement
to the effect that a holder of such Convertible Securities will be entitled to
receive such dividend only if such holder properly converts, exchanges or
exercises them on or prior to the record date referred to in clause (i) of this
sentence. Such notice will be sent by first-class mail, postage prepaid, to each
such holder at such holder's address as the same appears on the transfer books
of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(A) of the first paragraph under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company is required, not less than 35 Trading
Days and not more than 45 Trading Days prior to the redemption date, to cause to
be given to each holder of shares of the series of Common Stock subject to the
Disposition referred to in such paragraph, and to each holder of Convertible
Securities convertible into or exchangeable or exercisable for shares of such
Common Stock (unless alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of such Convertible
Securities) a notice setting forth (1) a statement that all shares of such
Common Stock outstanding on the redemption date will be redeemed, (2) the
redemption date (which will not be more than 85 Trading Days following the
consummation of such Disposition), (3) the type of property in which the
redemption price for the shares to be redeemed is to be paid, (4) the Net
Proceeds of such Disposition, (5) in the case of a Disposition of the properties
and assets attributed to the CarMax Group, the Outstanding CarMax Fraction on
the date of such notice, (6) the place or places where certificates for shares
of such Common Stock, properly endorsed or assigned for transfer (unless the
Company waives such requirement) are to be surrendered for delivery of cash
and/or securities or other property, (7) the number of outstanding shares of
such Common Stock and the number of shares of such series of Common Stock into
or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, (8) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities will be entitled to participate in such redemption only if such
holder properly converts, exchanges or exercises such Convertible Securities on
or prior to the redemption date referred to in clause (2) of this sentence and a
statement as to what, if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or the Articles as then
amended if such holder thereafter converts, exchanges or exercises such
Convertible Securities and (9) a statement to the effect that, except as
otherwise provided below, dividends on such shares of such Common Stock shall
cease to be paid as of such redemption date. Such notice will be sent by
first-class mail, postage prepaid to each such holder at such holder's address
as the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(B) of the first paragraph under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company is required, not later than the 30th
Trading Day following consummation of the Disposition referred to in such
paragraph, to cause to be given to each holder of shares of the series of Common
Stock relating to the Group subject to such Disposition and to each holder of
Convertible Securities that are convertible into or exchangeable or exercisable
for shares of such Common Stock (unless alternate provision for such notice to
the holders of such Convertible Securities is made pursuant to the terms of such
Convertible Securities), a notice setting forth (i) a date, not earlier than the
40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition in respect of which such redemption is to be
made, on which shares of such series of Common Stock will be selected for
redemption, (ii) the anticipated redemption date which will not be more than 85
Trading Days following the consummation of such Disposition, (iii) the type of
property in which the redemption price for the shares to be redeemed is to be
paid, (iv) the Net Proceeds of such Disposition, (v) in the case of a
Disposition of the properties and assets attributed to the CarMax Group, the
Outstanding CarMax Fraction, (vi) the number of outstanding shares of such
Common Stock and the number of shares of such Common Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, (vii) in the
case of notice to be given to holders of Convertible Securities, a statement to
the effect that a holder of such Convertible Securities will be entitled to
participate in such selection for redemption only if such holder properly
converts, exchanges or exercises them on or prior to the date referred to in
clause (i) of this sentence and a statement as to what, if anything, such holder
will be entitled to receive pursuant to the terms of such Convertible Securities
or the Articles as then amended if such
66
<PAGE>
holder thereafter converts, exchanges or exercises such Convertible Securities
and (viii) a statement that the Company will not be required to register a
transfer of any shares of such series of Common Stock for a period of 15 Trading
Days next preceding the date referred to in clause (i) of this sentence.
Promptly, but not earlier than 40 Trading Days nor more than 50 Trading Days
following the consummation of such Disposition, the Company is required to cause
to be given to each holder of shares of such Common Stock to be so redeemed a
notice setting forth (1) the number of shares of such Common Stock held by such
holder to be redeemed, (2) a statement that such shares of such Common Stock
will be redeemed, (3) the redemption date, (4) the kind and per share amount of
cash and/or securities or other property to be received by such holder with
respect to each share of such Common Stock to be redeemed, including details as
to the calculation thereof, (5) the place or places where certificates for
shares of such Common Stock, properly endorsed or assigned for transfer (unless
the Company waives such requirement) are to be surrendered for delivery of such
cash and/or securities or other property, (6) if applicable, a statement to the
effect that the shares being redeemed may no longer be transferred on the
transfer books of the Company after the redemption date and (7) a statement to
the effect that, except as otherwise provided below, dividends on such shares of
such Common Stock will cease to be paid as of such redemption date. Such notices
will be sent by first-class mail, postage prepaid to each such holder, at such
holder's address as the same appears on the transfer books of the Company.
If less than all of the outstanding shares of such Common Stock are to be
redeemed as described above under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," such shares will be redeemed by the Company pro
rata among the holders of outstanding shares of such Common Stock or by such
other method as may be determined by the Board of Directors to be equitable.
In the event of any conversion as described above under " -- Conversion of
Common Stock at Option of the Company" or " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company will cause to be given, not less than
35 Trading Days and not more than 45 Trading Days prior to the consummation
date, to each holder of shares of the series of Common Stock to be so converted
and to each holder of Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such Common Stock (unless alternate
provision for such notice to the holders of such Convertible Securities is made
pursuant to the terms of such Convertible Securities), a notice setting forth
(i) a statement that all outstanding shares of such Common Stock will be
converted, (ii) the conversion date (which, in the case of a conversion after a
Disposition, will not be more than 85 Trading Days following the consummation of
such Disposition), (iii) the per share number of shares of Circuit City Stock or
CarMax Stock or other class or series of common stock of the Company, as the
case may be, to be received with respect to each share of such Common Stock,
including details as to the calculation thereof, (iv) the place or places where
certificates for shares of such Common Stock, properly endorsed or assigned for
transfer (unless the Company waives such requirement) are to be surrendered for
delivery of certificates for shares of such Common Stock, (v) the number of
outstanding shares of such Common Stock and the number of shares of such Common
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, (vi) a statement to the effect that, except as otherwise provided
below, dividends on such shares of such Common Stock will cease to be paid as of
such conversion date and (vii) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to receive shares of such Common Stock
upon such conversion only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the conversion date
referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or the Articles as then amended if such holder thereafter
converts, exchanges or exercises such Convertible Securities. Such notice will
be sent by first-class mail, postage prepaid, to such holder at such holder's
address as the same appears on the transfer books of the Company.
If the Company determines to redeem shares of a series of Common Stock as
described above under " -- Redemption in Exchange for Stock of Subsidiary," the
Company will cause to be given to each holder of shares of such Common Stock and
to each holder of Convertible Securities convertible into or exchangeable or
exercisable for shares of such Common Stock (unless alternate provision for such
notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) a statement
that all shares of such Common Stock outstanding on the redemption date will be
redeemed in exchange for shares of common stock of the Circuit City Group
Subsidiaries (and, in the case of a redemption to which clause (i) of the second
sentence of the second paragraph under " -- Redemption in Exchange for Stock of
a Subsidiary" applies, CarMax Stock) or shares of common stock of the CarMax
Group Subsidiaries, as the case may be, (ii) the redemption date, (iii) if
CarMax Stock is being redeemed, the Outstanding CarMax Fraction on the date of
such notice, (iv) the place or places where certificates for shares of such
Common Stock properly endorsed or assigned for
67
<PAGE>
transfer (unless the Company waives such requirement) are to be surrendered for
delivery of certificates for shares of common stock of the Circuit City Group
Subsidiaries (and, in the case of a redemption to which clause (i) of the second
sentence of the second paragraph under " -- Redemption in Exchange for Stock of
a Subsidiary" applies, CarMax Stock) or shares of common stock of the CarMax
Group Subsidiaries, as the case may be, (v) a statement to the effect that,
except as otherwise provided below, dividends on such shares of such Common
Stock will cease to be paid as of such redemption date, (vi) the outstanding
number of shares of such Common Stock and the number of shares of such Common
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof and (vii) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities will be entitled to receive shares of common stock of the Circuit
City Group Subsidiaries (and, in the case of a redemption to which clause (i) of
the second sentence of the first paragraph under " -- Redemption in Exchange for
Stock of a Subsidiary" applies, CarMax Stock) or shares of common stock of the
CarMax Group Subsidiaries, as the case may be, only if such holder properly
converts, exchanges or exercises such Convertible Securities on or prior to the
date referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or the Articles of Amendment if such holder thereafter
converts, exchanges or exercises such Convertible Securities. Such notice will
be sent by first-class mail, postage prepaid, not less than 30 Trading Days nor
more than 45 Trading Days prior to the redemption date, to each such holder at
such holder's address as the same appears on the transfer books of the Company.
Neither the failure to mail any notice described above to any particular
holder of shares of any series of Common Stock or of any Convertible Securities
nor any defect therein will affect the sufficiency thereof with respect to any
other holder of outstanding shares of such Common Stock or of outstanding
Convertible Securities, or the validity of any such conversion or redemption.
The Company will not be required to issue or deliver fractional shares of
any class or series of capital stock or any fractional securities to any holder
of either series of Common Stock upon any conversion, redemption, dividend or
other distribution described above. If more than one share of Common Stock is
held at the same time by the same holder, the Company may aggregate the number
of shares of any class or series of capital stock that is issuable or the amount
of securities or property that is distributable to such holder upon any such
conversion, redemption, dividend or other distribution (including any fractions
of shares or securities). If the number of shares of any class or series of
capital stock or the amount of securities remaining to be issued or distributed
to any holder of such Common Stock is a fraction, the Company will, if such
fraction is not issued or distributed to such holder, pay a cash adjustment in
respect of such fraction in an amount equal to the Fair Value of such fraction
on the fifth Trading Day prior to the date such payment is to be made (without
interest).
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of Common Stock; provided, however, that if such shares
are converted or redeemed by the Company after the record date for determining
holders of such Common Stock entitled to any dividend or distribution thereon,
such dividend or distribution will be payable to the holders of such shares at
the close of business on such record date notwithstanding such conversion or
redemption, in each case without interest.
Before any holder of Common Stock will be entitled to receive certificates
representing shares of any capital stock, cash and/or other securities or
property to be distributed to such holder with respect to any conversion or
redemption of shares of such Common Stock, such holder is required to surrender
at such place as the Company specified certificates for shares of such Common
Stock, properly endorsed or assigned for transfer (unless the Company waives
such requirement). As soon as practicable after the Company's receipt of
certificates for such shares of such Common Stock, the Company will deliver to
the person for whose account such shares were so surrendered, or to the nominee
or nominees of such person, certificates representing the number of whole shares
of the kind of capital stock, cash and/or other securities or property to which
such person was entitled, together with any fractional payment referred to
above, in each case without interest. If less than all of the shares of Common
Stock represented by any one certificate are to be redeemed, the Company will
issue and deliver a new certificate for the shares of such Common Stock not
redeemed.
From and after any conversion or redemption of shares of either series of
Common Stock, all rights of a holder of shares of such Common Stock that were
converted or redeemed will cease, except for the right, upon surrender of the
certificates representing such shares of such Common Stock, to receive the cash
and/or the certificates representing shares of the kind and amount of capital
stock and/or other securities or property for which such shares were converted
or redeemed, together with any fractional payment or rights to dividends as
provided above, in each case without interest. No holder of a certificate that
immediately prior to the conversion or redemption of Common Stock represented
shares of such Common Stock will be entitled to receive any dividend or other
distribution or interest payment with respect to shares of any kind of capital
stock
68
<PAGE>
into or in exchange for which shares of such Common Stock were converted or
redeemed until surrender of such holder's certificate in exchange for a
certificate or certificates representing shares of such kind of capital stock.
Upon such surrender, there will be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable with respect to a record date occurring after the conversion, but which
were not paid by reason of the foregoing, with respect to the number of whole
shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a conversion, the
Company will, however, be entitled to treat the certificates for such Common
Stock that have not yet been surrendered for conversion as evidencing the
ownership of the number of whole shares of the kind of capital stock for which
the shares of such Common Stock represented by such certificates should have
been converted, notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion or redemption of
shares of either series of Common Stock pursuant hereto. The Company will not,
however, be required to pay any tax that may be payable in respect of any
transfer involved in the issue or delivery of any shares of capital stock and/or
other securities in a name other than that in which the shares of such Common
Stock so converted or redeemed were registered, and no such issue or delivery
will be made unless and until the person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax had been paid.
VOTING RIGHTS
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 with respect to
which the Common Stock or either series thereof or any series of Preferred Stock
would be entitled to vote as a separate voting group. On all matters as to which
both series of Common Stock would vote together as a single voting group, (i)
each outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes (including a
fraction of one vote) equal to the quotient (rounded to the nearest three
decimal places), of (A) the sum of (1) four times the average Market Value of
the CarMax Stock over the five-Trading Day period ending on the 10th Trading Day
prior to the record date for determining the holders of Common Stock entitled to
vote, (2) three times the average Market Value of the CarMax Stock over the next
preceding five-Trading Day period, (3) two times the average Market Value of the
CarMax Stock over the next preceding five-Trading Day period and (4) the average
Market Value of the CarMax Stock over the next preceding five-Trading Day
period, divided by (B) the sum of (1) four times the average Market Value of the
Circuit City Stock over the five-Trading Day period ending on such 10th Trading
Day, (2) three times the average Market Value of the Circuit City Stock over the
next preceding five-Trading Day period, (3) two times the average Market Value
of the Circuit City Stock over the next preceding five-Trading Day period and
(4) the average Market Value of the Circuit City Stock over the next preceding
five-Trading Day period. If shares of only one series of Common Stock are
outstanding, each share of that series shall be entitled to one vote. If either
series of Common Stock is entitled to vote as a separate voting group with
respect to any matter, each share of that series shall, for purposes of such
vote, be entitled to one vote on such matter.
To illustrate the foregoing, if the average Market Value of the CarMax
Stock for the periods specified in clause (A) above were $10, $20, $30 and $40,
respectively, and the average Market Value of the Circuit City Stock for the
periods specified in clause (B) above were $30, $40, $50 and $60, respectively,
each share of Circuit City Stock would have one vote and each share of CarMax
Stock would have 0.50 votes based on the following calculation:
_(4x$10)+(3x$20)+(2x$30)+(1x$40)_
(4x$30)+(3x$40)+(2x$50)+(1x$60)
Based on such number of votes, on any proposal where both series of Common Stock
vote together as a single voting group (with no classes or series of Preferred
Stock, if any, entitled to vote together with the holders of Common Stock) and
assuming four times as many shares of Circuit City Stock as CarMax Stock are
issued and outstanding, the shares of Circuit City Stock and CarMax Stock would
represent approximately 89% and 11%, respectively, of the total voting power.
The Company anticipates that upon completion of the Offering, the Circuit
City Stock will initially represent a substantial majority of the voting power
of all shares of Common Stock entitled to vote in the election of directors.
69
<PAGE>
The Company will set forth the number of outstanding shares of CarMax Stock
and Circuit City Stock in its Annual and Quarterly Reports filed pursuant to the
Exchange Act, and will disclose in any proxy statement for a shareholder meeting
the number of outstanding shares and per share voting rights of the CarMax Stock
and the Circuit City Stock.
The relative voting rights of the Circuit City Stock and the CarMax Stock
could fluctuate as described above so that a holder's voting rights will more
closely reflect the Market Value of such holder's equity investment in the
Company. Fluctuations in the relative voting rights of the Circuit City Stock
and the CarMax Stock could influence an investor interested in acquiring and
maintaining a fixed percentage of the voting power of the Company to acquire
such percentage of both series of Common Stock, and would limit the ability of
investors in one series to acquire for the same consideration relatively more or
less votes per share than investors in the other series.
The holders of CarMax Stock and Circuit City Stock vote together as a
single voting group, except as to certain mergers and statutory share exchanges
and certain amendments to the Articles affecting, among other things, the
designation, rights, preferences or limitations of either series of Common
Stock, in which case a separate vote by the holders of the particular series
affected would also be required. Accordingly, if a separate vote on a matter by
the holders of either the CarMax Stock or Circuit City Stock is not required
under the VSCA and if the Board of Directors does not require a separate vote,
the series that is entitled to more than the number of votes required to approve
such matter will be in a position to control the outcome of the vote on such
matter even if the matter involved a divergence or the appearance of a
divergence of the interests between the holders of the CarMax Stock and the
Circuit City Stock. Conversely, if a separate vote of the holders of either
CarMax Stock or Circuit City Stock is required to approve, for example, a merger
of the type described above, the favorable vote of the holders of more than
two-thirds of the total number of votes entitled to be cast with respect to each
of the CarMax Stock and Circuit City Stock may be required for approval. In such
instance, the holders of either the CarMax Stock or Circuit City Stock could
prevent approval of such merger notwithstanding the fact that the holders of
more than two-thirds of the total number of votes entitled to be cast with
respect to both the CarMax Stock and Circuit City Stock had voted in favor of
it. Under the VSCA and the Articles, (i) approval of certain matters, such as a
merger, statutory share exchange, and certain amendments to the Articles,
requires the approval of the holders of more than two-thirds of the total number
of votes entitled to be cast thereon by each voting group; (ii) approval of any
other amendments to the Articles requires the approval of the holders of a
majority of the votes entitled to be cast thereon by each voting group; and
(iii) approval of most other matters (other than the election of directors who
are elected by a plurality of the votes cast) requires the votes cast in favor
of the matter to exceed the votes cast opposing the matter. See "Risk
Factors -- Factors Relating to the CarMax Stock -- Limited Separate Shareholder
Voting Rights; Effects on Voting Power."
The Amended Articles will reserve to the Board of Directors the right to
condition the submission of a particular matter on receipt of a separate vote of
the holders of outstanding shares of CarMax Stock or Circuit City Stock. The
Board of Directors has no present intention of imposing such a separate vote
requirement on any matter which it can now foresee. However, should the Board of
Directors, in the exercise of its fiduciary duties and its good faith judgment
of the best interests of the Company, conclude that such a separate vote is
necessary or desirable, it has reserved the right to so require.
LIQUIDATION
In the event of a liquidation, dissolution or termination of the Company,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of the Company and full preferential amounts
(including any accumulated and unpaid dividends) to which holders of any series
of Preferred Stock are entitled (regardless of the Group to which such shares of
Preferred Stock were attributed), the holders of CarMax Stock and Circuit City
Stock will be entitled to receive the net assets, if any, of the Company
remaining for distribution to holders of Common Stock on a per share basis in
proportion to the Liquidation Units per share of each series. Each share of
CarMax Stock will have .5 of a Liquidation Unit and each share of Circuit City
Stock will have one Liquidation Unit. Thus, the liquidation rights of the
holders of the respective series may not bear any relationship to the relative
market values or the relative voting rights of the two series.
The Liquidation Units of the CarMax Stock and the Circuit City Stock were
determined by the Company in consultation with its financial advisors and are
based upon, among other factors, each Group's initial level of debt and equity
capitalization, each Group's recent historical financial performance, the market
prices of shares of comparable companies that are publicly traded and the
current state of the markets for public offerings and other stock transactions.
See "Risk Factors -- Factors Relating to the CarMax Stock -- Absence of Prior
Market for CarMax Stock; Possible Volatility of Stock Price." The Company
considers that its complete liquidation is a remote contingency, and its
financial advisors believe that, in general, these liquidation provisions are
immaterial to trading in CarMax Stock and Circuit City Stock. No holders of
CarMax Stock will have any special right to receive specific assets attributable
to the CarMax Group and no holder of Circuit City Stock
70
<PAGE>
will have any special right to receive specific assets attributable to the
Circuit City Group in the case of a liquidation, dissolution or termination of
the Company.
If the Company subdivides (by stock split, reclassification or otherwise)
or combines (by reverse stock split or otherwise) the outstanding shares of
either CarMax Stock or Circuit City Stock or declares a dividend or other
distribution of shares of CarMax Stock or Circuit City Stock to holders of such
series of Common Stock, the number of Liquidation Units of the CarMax Stock or
the number of Liquidation Units of the Circuit City Stock, will be appropriately
adjusted as determined by the Board of Directors so as to avoid any dilution in
aggregate liquidation rights of any series of Common Stock. For example, in case
the Company were to effect a two-for-one split of the Circuit City Stock, an
adjustment would be made so that either the Circuit City Stock would be entitled
to 0.5 of a Liquidation Unit per share or the CarMax Stock would be entitled to
one Liquidation Unit per share, as determined by the Board of Directors, in
order to avoid dilution in the aggregate liquidation rights of holders of CarMax
Stock.
Neither a merger nor share exchange of the Company into or with any other
corporation, nor a merger or share exchange of any other corporation into or
with the Company, nor any sale, lease, exchange or other disposition of all or
any part of the assets of the Company, will, alone, be deemed to be a
liquidation of the Company, or cause the dissolution of the Company, for
purposes of the liquidation provisions set forth above.
DETERMINATIONS BY THE BOARD OF DIRECTORS
Any determinations made in good faith by the Board of Directors under any
provision described above and any determinations with respect to any Group or
the rights of holders of shares of either series of Common Stock, would be final
and binding on all shareholders of the Company, subject to the rights of
shareholders under applicable Virginia law and under the federal securities
laws.
PREEMPTIVE RIGHTS
Neither the holders of the CarMax Stock nor the holders of the Circuit City
Stock will have any preemptive rights or any rights to convert their shares into
any other securities of the Company.
INTER-GROUP INTEREST
The Board of Directors has determined that 75,440,000 is the number of
shares of CarMax Stock that, if issued, would initially represent 100% of the
equity value of the CarMax Group. Such number was determined based on the
historical and projected financial and operating information of the CarMax
Group, the market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of the CarMax
Group, prevailing equity market conditions and the desired range of the initial
public offering price of the CarMax Stock. The number of shares of CarMax Stock
representing 100% of the equity value of the CarMax Group will increase as a
result of the Offering to the extent of the shares issued for the account of the
CarMax Group. For example, if 20% of the equity value of the CarMax Group is
issued in the Offering, the 18,860,000 shares representing such percentage and
issued to the public would cause the number of shares representing 100% of the
equity value of the CarMax Group to increase to 94,300,000 without giving effect
to the CarMax Stock Options.
The 18,860,000 shares of CarMax Stock to be issued in the Offering will be
issued for the account of the CarMax Group. As a result, immediately after the
Offering, the Outstanding CarMax Fraction will equal 20% and the Inter-Group
Interest Fraction will equal 80%, without giving effect to the CarMax Stock
Options. If the Underwriters exercise their over-allotment option, the number of
shares subject to such option also will be issued for the account of the CarMax
Group. If the over-allotment option is exercised in full, the Outstanding CarMax
Fraction will equal 22.3% and the Inter-Group Interest Fraction will equal
77.7%, without giving effect to the CarMax Stock Options.
The "Outstanding CarMax Fraction" means the percentage interest in the
CarMax Group represented at any time by the outstanding shares of CarMax Stock,
and the "Inter-Group Interest Fraction" means the remaining percentage interest
in the CarMax Group that is attributed to the Circuit City Group. The sum of the
Inter-Group Interest Fraction and the Outstanding CarMax Fraction will always
equal 100%. The "Number of Shares Issuable with Respect to the Inter-Group
Interest" means the number of shares of CarMax Stock that could be sold or
otherwise issued by the Company for the account of the Circuit City Group in
respect of the Inter-Group Interest. The Inter-Group Interest would not be
represented by actual shares of CarMax Stock and could not be voted by the
Circuit City Group.
71
<PAGE>
At the time of any additional sale of CarMax Stock, the Board of Directors
would, in its sole discretion, determine the allocation of the net proceeds of
such sale between the CarMax Group and the Circuit City Group. The Board of
Directors could allocate 100% of the net proceeds of a sale of CarMax Stock to
the CarMax Group or to the Circuit City Group, in which event the net proceeds
would be reflected entirely in the financial statements of the Group to which
such proceeds would be allocated. If the net proceeds of any sale of CarMax
Stock were allocated to the Circuit City Group in respect of its Inter-Group
Interest, the Number of Shares Issuable with Respect to the Inter-Group Interest
would be reduced, the Inter-Group Interest Fraction would accordingly also be
reduced and the Outstanding Interest Fraction would be proportionately
increased. If the net proceeds of any sale of CarMax Stock were allocated to the
CarMax Group, the Number of Shares Issuable with Respect to the Inter-Group
Interest would not be reduced, but the Inter-Group Interest Fraction would
nonetheless be reduced, and the Outstanding Interest Fraction would increase
accordingly.
The Board of Directors reserves the right to issue shares of CarMax Stock
as a distribution on the Circuit City Stock, although it has no current
intention to do so. Such a distribution would be treated as a distribution of
shares issuable with respect to the Inter-Group Interest and, as a result, the
Number of Shares Issuable with Respect to the Inter-Group Interest would
decrease by the number of shares distributed to the holders of Circuit City
Stock, resulting in a reduction in the Inter-Group Interest Fraction and a
proportionate increase in the Outstanding CarMax Fraction.
If the Company repurchases shares of CarMax Stock with cash or property of
the Circuit City Group, the Number of Shares Issuable with Respect to the
Inter-Group Interest and the Inter-Group Interest Fraction would increase and
the Outstanding CarMax Fraction would decrease accordingly. If the repurchase of
shares of CarMax Stock were attributed to the CarMax Group, the Number of Shares
Issuable with Respect to the Inter-Group Interest would not change but the
Inter-Group Interest Fraction would nonetheless increase and the Outstanding
CarMax Fraction would decrease accordingly.
The foregoing determinations with respect to the allocation of issuances of
shares of CarMax Stock between the Groups and the choice of which Group's funds
are to be used to repurchase shares of CarMax Stock will be made by the Board of
Directors, in its discretion, after consideration of a number of factors,
including, among others, the relative levels of internally generated cash flow
of each Group, the long-term business prospects for each Group and the
availability and cost of alternative financing sources.
Cash or other property allocated to the Circuit City Group that is
contributed as additional equity to the CarMax Group would increase the Number
of Shares Issuable with Respect to the Inter-Group Interest (based on the then
current Market Value of shares of CarMax Stock), and, accordingly, would
increase the Inter-Group Interest Fraction and decrease the Outstanding CarMax
Fraction. Cash or other property allocated to the CarMax Group that is
transferred to the Circuit City Group would, if so determined by the Board of
Directors, decrease the Number of Shares Issuable with Respect to the
Inter-Group Interest (based on the then current Market Value of shares of CarMax
Stock) and, accordingly, would decrease the Inter-Group Interest Fraction and
increase the Outstanding CarMax Fraction. The Board of Directors could
determine, in its sole discretion, to make such contribution or transfer after
consideration of a number of factors, including, among others, the financing
needs and objectives of the recipient Group, the investment objectives of the
transferring Group, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic conditions.
The financial statements of the Circuit City Group will be credited, and
the financial statements of the CarMax Group will be charged with, an amount
equal to the product of (i) the Fair Value of any dividend, redemption payment
or other distribution paid or distributed in respect of the outstanding shares
of CarMax Stock (including any dividend of, or redemption payment made with, Net
Proceeds from a Disposition), times (ii) a fraction, the numerator of which is
the Inter-Group Interest Fraction on the record date for such dividend,
redemption payment or distribution and the denominator of which is the
Outstanding CarMax Fraction on the record date for such dividend, redemption
payment or distribution.
"Number of Shares Issuable with Respect to the Inter-Group Interest" means
the number of shares determined by the Board of Directors prior to the first
issuance of shares of CarMax Stock to be the number of shares of CarMax Stock
that initially represents 100% of the common shareholders' equity of the Company
attributable to the CarMax Group (which determination will be set forth in a
statement filed with the records of the actions of the Board of Directors)
provided, however, that such number shall from time to time thereafter be:
(i) adjusted, if before such adjustment such number is greater than
zero, as determined by the Board of Directors to be appropriate to reflect
equitably any subdivision (by stock split or otherwise) or combination (by
reverse stock split or otherwise) of the CarMax Stock or any dividend or
other distribution of shares of CarMax Stock to holders of shares of CarMax
Stock or any reclassification of CarMax Stock;
72
<PAGE>
(ii) decreased (but to not less than zero), if before such adjustment
such number is greater than zero, by action of the Board of Directors by
(1) the number of shares of CarMax Stock issued or sold by the Company
that, immediately prior to such issuance or sale, were included in the
Number of Shares Issuable with Respect to the Inter-Group Interest, (2) the
number of shares of CarMax Stock issued upon conversion, exchange or
exercise of Convertible Securities that, immediately prior to the issuance
or sale of such Convertible Securities, were included in the Number of
Shares Issuable with Respect to the Inter-Group Interest, (3) the number of
shares of CarMax Stock issued by the Corporation as a dividend or other
distribution (including in connection with any reclassification or exchange
of shares) to holders of Circuit City Stock, (4) the number of shares of
CarMax Stock issued upon the conversion, exchange or exercise of any
Convertible Securities issued by the Company as a dividend or other
distribution (including in connection with any reclassification or exchange
of shares) to holders of Circuit City Stock or (5) the number (rounded, if
necessary, to the nearest whole number) equal to the quotient of (a) the
aggregate Fair Value as of the date of contribution of properties or assets
(including cash) transferred from the CarMax Group to the Circuit City
Group in consideration for a reduction in the Number of Shares Issuable
with Respect to the Inter-Group Interest divided by (b) the Market Value of
one share of CarMax Stock as of the date of such transfer; and
(iii) increased by (1) the number of outstanding shares of CarMax
Stock repurchased by the Company for consideration that is attributed as
contemplated by the definition of "Circuit City Group" set forth above to
the Circuit City Group and (2) the number (rounded, if necessary, to the
nearest whole number) equal to the quotient of (a) the Fair Value of
properties or assets (including cash) therefore attributed as contemplated
by the definition of "Circuit City Group" set forth above to the Circuit
City Group that are contributed to the CarMax Group in consideration of an
increase in the Number of Shares Issuable with Respect to the Inter-Group
Interest, divided by (b) the Market Value of one share of CarMax Stock as
of the date of such contribution.
For further discussion of, and illustrations of the calculation of the
Inter-Group Interest Fraction, the Outstanding CarMax Fraction and the Number of
Shares Issuable with Respect to the Inter-Group Interest and the effects thereon
of dividends on, and issuances and repurchase of, shares of CarMax Stock, and
transfers of cash or other property between Groups, see Annex I hereto.
RESTATED RIGHTS AGREEMENT
The Company has issued preferred stock purchase rights (the "Original
Rights") to all holders of the Company's existing common stock pursuant to a
Rights Agreement dated April 29, 1988 between the Company and Crestar Bank, as
Rights Agent, as amended and restated as of March 5, 1996 (the "Rights
Agreement"). Prior to the issuance of any shares of CarMax Stock in the
Offering, (i) the Rights Agreement will be amended and restated (the "Restated
Rights Agreement") to reflect the change in the capital structure of the
Company, (ii) the Articles will be amended by action of the Board of Directors
to establish a new series of Preferred Stock (the "Series F Preferred Stock"),
(iii) the Board of Directors will authorize the issuance of one preferred stock
purchase right (a "CarMax Right") with respect to each share of CarMax Stock
that might be issued from time to time, including each such share issued
pursuant to the Offering, and each Original Right will be redesignated as a
"Circuit City Right." The CarMax Rights and the Circuit City Rights are
collectively referred to herein as the "Rights."
The Restated Rights Agreement will provide that, prior to the earlier of
(i) the 10th day (the "Ownership Trigger Date") after a public announcement that
a person or group (including any affiliate or associate of such person or group)
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of shares of Common Stock representing 15% or more of the
total number of votes entitled to be cast generally in the election of directors
of all outstanding shares of Common Stock or (ii) the 10th business day after
the date of the commencement of or first public announcement of the intent of
any person or group to commence a tender or exchange offer the consummation of
which would result in such person or group becoming an Acquiring Person (the
earlier of such dates being called the "Distribution Date"), the CarMax Rights
and the Circuit City Rights will be evidenced by the certificates representing
shares of CarMax Stock and Circuit City Stock, respectively, then outstanding,
and no separate Rights certificates will be distributed. Therefore, until the
Distribution Date, the CarMax Rights will be transferred with and only with the
CarMax Stock, and the Circuit City Rights will be transferred with and only with
the Circuit City Stock. For purposes of the Restated Rights Agreement, the total
voting rights of the Common Stock will be determined based upon the fixed voting
rights of holders of outstanding shares of CarMax Stock and Circuit City Stock
in effect at the time of any such determination. See " -- Voting Rights."
Upon the close of business on the Distribution Date, the Rights will
separate from the Common Stock and become exercisable as described below. The
Rights will expire on April 29, 1998 (the "Expiration Date"), unless earlier
redeemed by the Company as described below.
73
<PAGE>
Following the Distribution Date, registered holders of Rights will be
entitled to purchase from the Company (i) in the case of a CarMax Right, one
four-hundredth (1/400th) of a share of Series F Preferred Stock at a purchase
price of $22, subject to adjustment (the "Series F Purchase Price"), and (ii) in
the case of a Circuit City Right, one four-hundredth (1/400th) of a share of
Series E Preferred Stock at a purchase price of $35, subject to adjustment (the
"Series E Purchase Price").
In the event (i) any person or group becomes an Acquiring Person other than
pursuant to a cash tender offer for all outstanding shares of Common Stock which
is determined to be fair by the Continuing Directors (i.e., those directors who
are such on the Distribution Date or are elected or nominated by a majority of
the Continuing Directors in office on the date of such election or nomination),
(ii) an Acquiring Person engages in one or more "self-dealing" transactions with
the Company as set forth in the Restated Rights Agreement, (iii) the Company is
the surviving or continuing corporation in a merger or other combination with an
Acquiring Person and all the Common Stock remains outstanding and is not changed
or exchanged or (iv) while there is an Acquiring Person, there shall be any
reclassification of securities, recapitalization of the Company or other
transaction or series of transactions that has the effect of increasing by more
than 1% the proportionate share of the outstanding shares of any class or series
of equity securities of the Company beneficially owned by the Acquiring Person,
then the Rights would "flip-in," and proper provision would be made so that each
holder of a Right, other than Rights which are, or under certain circumstances
specified in the Restated Rights Agreement, were beneficially owned by any
Acquiring Person (which will thereafter be void), will thereafter (a) in the
case of a CarMax Right, entitle its holder to purchase, at the Series F Purchase
Price, a number of shares of CarMax Stock with a market value equal to twice the
Series F Purchase Price and (b) in the case of a Circuit City Right, entitle its
holder to purchase, at the Series E Purchase Price, a number of shares of
Circuit City Stock with a market value equal to twice the Series E Purchase
Price.
In the event, following the announcement that a person or group has become
an Acquiring Person, (i) the Company engages in a merger or consolidation with
another entity in which the Company is not the surviving corporation or in which
any shares of the outstanding Common Stock are changed into or exchanged for
stock or other securities of another person (or the Company) or cash or other
property or (ii) 50% or more of the Company's consolidated assets or earning
power are sold, the Rights would "flip-over," and each CarMax Right and each
Circuit City Right will entitle its holder to purchase, for the Series F
Purchase Price and Series E Purchase Price, respectively, a number of shares of
common stock of such entity or purchaser with a market value equal to twice the
applicable Purchase Price.
After any person or group becomes an Acquiring Person and before any
Acquiring Person becomes the beneficial owner of shares of Common Stock
representing 50% or more of the total number of votes entitled to be cast
generally in the election of directors of all outstanding shares of Common
Stock, the Company may, with the approval of a majority of the Continuing
Directors, exchange all or part of the CarMax Rights and Circuit City Rights for
shares of CarMax Stock or Circuit City Stock, respectively, or for shares of
Series F Preferred Stock or Series E Preferred Stock (or other preferred shares
having the same rights, privileges and preferences), respectively. In such
event, the exchange ratio would be one share of the applicable Common Stock, or
one four-hundredth (1/400th) of a share of the applicable series of Preferred
Stock, per Right.
At any time prior to the earlier of the Ownership Trigger Date or the
Expiration Date, the Company may, at its option, redeem all but not less than
all of the then outstanding Rights at a redemption price of $.0025 per Right
(the "Redemption Price"), provided, however, that any authorization of
redemption will require the concurrence of a majority of the Continuing
Directors if (i) any person or group has become an Acquiring Person or (ii)
there has been a change in a majority of the directors resulting from a proxy or
consent solicitation if any person participating in such solicitation has stated
(or the Board of Directors has determined in good faith) that such person
intends to take, or may consider taking, any action that would result in such
person becoming an Acquiring Person or that would cause the Rights to "flip-in"
or "flip-over." Immediately upon the action of the Board of Directors ordering
the redemption of the Rights, the Rights will terminate and the only right
thereafter of the holders of the Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
At any time prior to the Distribution Date, the Company may, without the
approval of any holders of Rights, supplement or amend any provision of the
Restated Rights Agreement, except that no supplement or amendment may be made
that changes the Redemption Price, the Expiration Date, the Purchase Prices or
the number of one four-hundredths of a share of Preferred Stock for which a
Right is exercisable (such provisions being referred to herein collectively as
the "Principal Economic Terms"). From and after the Distribution Date, the
Company may, without the approval of any holders of Rights, supplement or amend
the Restated Rights Agreement (i) to cure any ambiguity, (ii) to correct or
supplement any provision
74
<PAGE>
that may be defective or inconsistent, (iii) subject to certain limitations and,
in certain circumstances, only with the concurrence of a majority of the
Continuing Directors, to shorten or lengthen any time period under the Restated
Rights Agreement (other than a time period relating to when the Rights may be
redeemed if at the time of such supplement or amendment the Rights are not then
redeemable), or (iii) in any manner that the Company may deem necessary or
desirable and which does not adversely affect the interests of the holders of
Rights (other than an Acquiring Person) and which does not change the Principal
Economic Terms.
A copy of the form of the Restated Rights Agreement (which includes as
Exhibit B-2 the Form of Rights Certificate for CarMax Rights) has been filed
with the Commission as an Exhibit to the Registration Statement of which this
Prospectus is a part. A copy of the Rights Agreement previously has been filed
with the Commission as an Exhibit to a Registration Statement on Form 8-A, and
is incorporated herein by reference. A copy of the form of the Restated Rights
Agreement is available free of charge from the Company. This summary description
of the CarMax Rights does not purport to be complete and is qualified in its
entirety by reference to the form of the Restated Rights Agreement.
ANTI-TAKEOVER CONSIDERATIONS
The following information is provided with respect to certain matters that
could be viewed as having the effect of discouraging an attempt to obtain
control of the Company.
The Articles currently provide for the issuance of Preferred Stock in
series at the discretion of the Board of Directors without further action by the
Company's shareholders (except as may be required by Virginia law or the rules
or regulations of any securities exchange on which the Company's securities may
then be listed). The Board of Directors may designate any of such series of
Preferred Stock and may establish the relative rights and preferences of each
series; however, no series of Preferred Stock may entitle the holder thereof to
more than one vote per share. The Articles authorize 2,000,000 shares of
Preferred Stock of which 1,000,000 shares have been or will be designated as
Series E or Series F Preferred Stock and 800,000 of those are or will be
reserved for issuance in connection with the Company's Restated Rights
Agreement. One of the effects of the existence of authorized, unissued and
unreserved Preferred Stock could be to enable the Board of Directors to issue
shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management. Such additional shares also could be
used to dilute the stock ownership of persons seeking to obtain control of the
Company. The Articles also provide for a classified Board of Directors under
which approximately one-third of the total number of directors are elected each
year. In addition, pursuant to the Bylaws, only the Chairman, the President or
the Board of Directors, and not the shareholders of the Company, are permitted
to call a special meeting of shareholders.
Certain of the Company's financing arrangements include provisions allowing
for the termination of such arrangements and the acceleration of the borrowings
and other obligations thereunder in the event (i) any person or group becomes,
or acquires the right to become, the beneficial owner of securities of the
Company representing 50% or more of the combined voting power of the Company's
outstanding voting securities or (ii) a transaction or series of transactions
occurs as a result of which the directors immediately prior to such
transaction(s) (together with persons elected or nominated by not less than two-
thirds of such directors) cease to constitute a majority of the Board of
Directors.
The Restated Rights Agreement will permit disinterested shareholders to
acquire additional shares of the Company or of an acquiring company at a
substantial discount in the event of certain described changes in control. See
" -- Restated Rights Agreement."
The Company is subject to the "affiliated transactions" and "control share
acquisitions" statutes of the VSCA, which are summarized below.
The "affiliated transactions" statute restricts certain transactions
("Affiliated Transactions") between a Virginia corporation having more than 300
shareholders of record and any person (an "Interested Shareholder") who
beneficially owns more than 10% of any class of the corporation's voting
securities. These restrictions, which are described below, do not apply to an
Affiliated Transaction with an Interested Shareholder who has been such
continuously since the date the corporation first had 300 shareholders of record
or whose acquisition of shares making such person an Interested Shareholder was
previously approved by a majority of the corporation's Disinterested Directors.
"Disinterested Director" means, with respect to a particular Interested
Shareholder, a member of the corporation's board of directors who was (i) a
member on the date on which an Interested Shareholder became an Interested
Shareholder or (ii) recommended for election by, or was elected to fill a
vacancy and received the affirmative vote of, a majority of the Disinterested
Directors then on the Board of Directors. Affiliated
75
<PAGE>
Transactions include mergers, share exchanges, material dispositions of
corporate assets not in the ordinary course of business, any dissolution of the
corporation proposed by or on behalf of an Interested Shareholder, or any
reclassification, including reverse stock splits, recapitalization or merger of
the corporation with its subsidiaries, which increases the percentage of voting
shares owned beneficially by an Interested Shareholder by more than 5%. The
"affiliated transactions" statute prohibits a corporation from engaging in an
Affiliated Transaction with an Interested Shareholder for a period of three
years after the Interested Shareholder became such unless the transaction is
approved by the affirmative vote of a majority of the Disinterested Directors
and by the affirmative vote of the holders of two-thirds of the voting shares
other than those shares beneficially owned by the Interested Shareholder.
Following the three-year period, in addition to any other vote required by law
or by the corporation's articles of incorporation, an Affiliated Transaction
must be approved either by a majority of the Disinterested Directors or by the
shareholder vote described in the preceding sentence unless the transaction
satisfies the fair-price or certain other provisions of the statute. These fair
price provisions require, in general, that the consideration to be received by
shareholders in the Affiliated Transaction (a) be in cash or in the form of
consideration used by the Interested Shareholder to acquire the largest number
of its shares and (b) not be less, on a per share basis, than an amount
determined in the manner specified in the statute by reference to the highest
price paid by the Interested Shareholder for shares it acquired and the fair
market value of the shares on specified dates.
The "control share acquisitions" statute provides that shares of a Virginia
corporation having 300 or more shareholders of record which are acquired in a
"Control Share Acquisition" have no voting rights unless such rights are granted
by a shareholders' resolution approved by the holders of a majority of the votes
entitled to be cast on the election of directors by persons other than the
acquiring person or any officer or employee-director of the corporation. A
"Control Share Acquisition" is an acquisition of voting shares which, when added
to all other voting shares beneficially owned by the acquiring person, would
cause such person's voting strength with respect to the election of directors to
meet or exceed any of the following thresholds: (i) one-fifth, (ii) one-third or
(iii) a majority. An acquiring person is entitled, before or after a Control
Share Acquisition, to file a disclosure statement with the corporation and
demand a special meeting of shareholders to be called for the purpose of
considering whether to grant voting rights for the shares acquired or proposed
to be acquired. If authorized in the corporation's articles of incorporation or
bylaws before a Control Share Acquisition has occurred, the corporation may,
during specified periods, redeem the shares so acquired if no disclosure
statement is filed or if the shareholders have failed to grant voting rights to
such shares. In the event full voting rights are granted to an acquiring person
who then has majority voting power, those shareholders who did not vote in favor
of such grant are entitled to dissent and demand payment of the fair value of
their shares from the corporation. The control share acquisitions statute does
not apply to an actual or proposed Control Share Acquisition if the
corporation's articles of incorporation or bylaws are amended, within the time
limits specified in the statute, to so provide.
The Company's Bylaws establish advance notice procedures, as described
below, for shareholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of shareholders of
the Company.
The Bylaws provide that nominations for the election of directors may be
made only by the Board of Directors or by a shareholder entitled to vote in the
election of directors who gives timely written notice to the Secretary of the
Company. Any such notice must be given not later than (i) with respect to an
election to be held at an annual meeting of shareholders, 120 days in advance of
such meeting or (ii) with respect to a special meeting of shareholders for the
election of directors, the close of business on the seventh day following the
date on which notice of such meeting is first given to shareholders. The
shareholder's notice must set forth (a) the name and address of the shareholder
who intends to make the nomination and of the person(s) to be nominated; (b) a
representation that the shareholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person(s) specified in the notice; (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person(s) (naming such person(s)) pursuant to which
the nomination(s) are to be made by the shareholder; (d) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Company if so elected.
The Bylaws also provide that in order to bring before an annual meeting of
shareholders any proper business that a shareholder has not sought to have
included in the Company's proxy statement for the meeting, a shareholder must
give timely written notice to the Secretary or Assistant Secretary of the
Company at the Company's principal office. Any such notice must be received (i)
on or after March 1st and before April 1st of the year in which the meeting will
be held, if clause (ii) is not applicable, or (ii) not less than 60 days before
the date of the meeting if the date for such meeting prescribed in the Bylaws
has been changed by more than 30 days. The shareholder's notice must set forth
(a) the name and address, as they
76
<PAGE>
appear on the Company's stock transfer books, of the shareholder, (b) the class
and number of shares of stock of the Company beneficially owned by the
shareholder, (c) a representation that the shareholder is a shareholder of
record at the time of the giving of the notice and intends to appear in person
or by proxy at the meeting to present the business specified in the notice, (d)
a brief description of the business desired to be brought before the meeting,
including the complete text of any resolutions to be presented and the reasons
for wanting to conduct such business and (e) any interest that the shareholder
may have in such business.
Certain provisions described above may have the effect of delaying
shareholder actions with respect to certain business combinations and the
election of new members of the Board of Directors. As such, the provisions could
have the effect of discouraging open market purchases of Common Stock because
they may be considered disadvantageous by a shareholder who desires to
participate in a business combination or elect a new director.
STOCK TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A. acts as the registrar and transfer agent for
both the CarMax Stock and the Circuit City Stock.
77
<PAGE>
CERTAIN UNITED STATES TAX CONSEQUENCES
The following is a discussion of certain of the material United States
federal income tax consequences of the ownership and disposition of the CarMax
Stock, including certain anticipated United States income and estate tax
consequences of the ownership and disposition of the CarMax Stock applicable to
Non-United States Holders of such CarMax Stock. For the purpose of this
discussion, a "Non-United States Holder" is any corporation, individual,
partnership, estate or trust that is, as to the United States, a foreign
corporation, a non-resident alien individual, a foreign partnership or a
non-resident fiduciary of a foreign estate or trust as such terms are defined in
the Internal Revenue Code of 1986, as amended (the "Code"). This discussion does
not deal with all aspects of United States income and estate taxation and does
not deal with foreign, state and local tax consequences that may be relevant to
Non-United States Holders in light of their personal circumstances. Furthermore,
the following discussion is based on current provisions of the Code and
administrative and judicial interpretations as of the date hereof, all of which
are subject to change. Prospective investors are urged to consult their tax
advisors regarding the United States federal, state, local and non-United States
income and other tax consequences of owning and disposing of CarMax Stock.
GENERAL
In the opinion of McGuire, Woods, Battle & Boothe, L.L.P., tax counsel to
the Company, the CarMax Stock will be treated for federal income tax purposes as
common stock of the Company. Accordingly, for federal income tax purposes, (i)
the Company will not recognize any income, gain or loss as a result of the
Offering and sale of the CarMax Stock; (ii) a holder of CarMax Stock will not
recognize any income, gain or loss upon the exchange of CarMax Stock for Circuit
City Stock, either pursuant to the Company's option or upon the Disposition of
all or substantially all of the assets of the CarMax Group, except for cash
received in lieu of fractional shares; and (iii) the tax basis of Circuit City
Stock received in such exchange will be the tax basis of the CarMax Stock
exchanged therefor, and, assuming that the CarMax Stock is held as a capital
asset, the holding period of such Circuit City Stock will include the holding
period of such CarMax Stock.
The U.S. Internal Revenue Service (the "Service") has announced that it
will not issue advance rulings on the classification of an instrument that has
certain voting and liquidation rights in an issuing corporation but whose
dividend rights are determined by reference to the earnings of a segregated
portion of the issuing corporation's assets, including assets held by a
subsidiary. In addition, there are no court decisions or other authorities that
bear directly on transactions similar to the Offering. It is possible,
therefore, that the Service could assert that the CarMax Stock represents
property other than stock of the Company. If the CarMax Stock were treated as
property other than stock of the Company, the Company or its subsidiaries (i)
could recognize a significant taxable gain on the sale of the CarMax Stock in an
amount equal to the excess of the fair market value of such stock sold over its
federal income tax basis to the Company or such subsidiaries and (ii) the
Company could lose its ability to file consolidated federal income tax returns
with the CarMax Group (one consequence being that any dividends paid or deemed
to be paid by the CarMax Group to the Company would be taxable to the Company,
subject to any applicable dividends received deduction). As indicated above,
however, it is the opinion of counsel that the Service would not prevail in any
such assertion.
The foregoing discussion is for general information only. It is based on
the Code, as amended to the date hereof, United States Treasury Department
regulations, published positions of the Service and court decisions now in
effect, all of which are subject to change. In particular, Congress could enact
legislation affecting the treatment of stock with characteristics similar to the
CarMax Stock or the United States Treasury Department could change the current
law in future regulations, including regulations issued pursuant to its
authority under Section 337(d) of the Code. Any future legislation or
regulations could apply retroactively.
TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
DIVIDENDS
Generally, any dividend paid to a Non-United States Holder of CarMax Stock
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or at a lesser applicable treaty rate. Under
current United States Treasury regulations, dividends paid to an address outside
the United States are presumed to be paid to a resident of such country for
purposes of the withholding discussed above, and under the current
interpretation of United States Treasury regulations, for purposes of
determining applicability of a tax treaty rate. The United States Treasury
Department has issued proposed regulations that, if finalized, would require a
Non-United States Holder of CarMax Stock seeking to claim the benefit of an
applicable treaty rate (and to avoid backup withholding, as discussed below) to
satisfy applicable certification and other requirements.
78
<PAGE>
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from such withholding tax. However, such effectively
connected dividends, net of certain deductions and credits, are taxed at the
same graduated rates applicable to United States persons. A Non-United States
Holder may claim exemption from withholding under the effectively connected
income exception by filing Form 4224 (Statement Claiming Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of Business
in the United States) with the Company or its paying agent.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may be
subject to a branch profits tax at a rate of 30% or at a lesser applicable
treaty rate.
A Non-United States Holder of CarMax Stock eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Service.
DISPOSITION OF CARMAX STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his CarMax Stock unless (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder, (ii) the Non-United
States Holder is an individual who is present in the United States for a period
or periods aggregating 183 days or more during the calendar year in which such
sale or disposition occurs and certain other conditions are met or (iii) the
Company is or has been a "United States real property holding corporation" for
federal income tax purposes at any time within the shorter of the five-year
period preceding such disposition or such holder's holding period.
The Company has determined that it is not, and does not believe that it
will become, a "United States real property holding corporation" for federal
income tax purposes. If the Company were to become a "United States real
property holding corporation," a Non-United States Holder who actually or
constructively owned (during the five-year period preceding such disposition)
more than 5% of the CarMax Stock would be subject to federal income tax on any
gain from the sale or other disposition of such Stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments of dividends to a Non-United States Holder at an address outside
the United States generally will not be subject to backup withholding and
information reporting. Dividends paid to a Non-United States Holder at an
address within the United States may be subject to backup withholding at a rate
of 31% if the Non-United States Holder fails to establish that it is entitled to
an exemption or to provide a correct taxpayer identification number and other
information to the payor. Generally, the Company must report to the Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Service may make its reports available to tax
authorities in the recipient's country of residence.
The payment of the proceeds of the disposition of CarMax Stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption. The payment of the proceeds of the disposition by a Non-United States
Holder of CarMax Stock to or through a foreign office of a broker will not be
subject to backup withholding. However, information reporting requirements (but
no backup withholding) will apply to a payment of disposition proceeds outside
the United States through an office outside the United States of a broker that
is (a) a United States person, (b) a United States controller foreign
corporation or (c) a foreign person 50% or more of whose gross income for
certain periods is from a United States trade or business unless such broker has
documentary evidence in its files of the owner's foreign status and has no
actual knowledge to the contrary.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the Service.
ESTATE TAX
A nonresident alien individual who owns CarMax Stock at the time of his
death or has made certain lifetime transfers of an interest in CarMax Stock will
be required to include the value of such stock in his gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
79
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting
Agreement, dated the date of this Prospectus (the "Underwriting Agreement"), the
Company has agreed to sell 18,860,000 shares of CarMax Stock, and the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co. and Wheat, First Securities, Inc. are serving as U.S.
Representatives, have severally agreed to purchase, and the International
Underwriters named below, for whom Morgan Stanley & Co. International Limited,
Goldman Sachs International and Wheat, First Securities, Inc. are serving as
International Representatives, have severally agreed to purchase, the respective
number of shares of CarMax Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.............................................................................
Goldman, Sachs & Co...........................................................................................
Wheat, First Securities, Inc..................................................................................
----------
Subtotal................................................................................................... 15,088,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited....................................................................
Goldman Sachs International...................................................................................
Wheat, First Securities, Inc..................................................................................
----------
Subtotal................................................................................................... 3,772,000
----------
Total.................................................................................................... 18,860,000
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters." The Underwriting Agreement provides that the
obligations of the several Underwriters to pay for and accept delivery of the
shares of CarMax Stock offered hereby are subject to the approval of certain
legal matters by counsel and to certain other conditions. The Underwriters are
obligated to take and pay for all the shares of CarMax Stock offered hereby
(other than those covered by the over-allotment option described below) if any
such shares are taken.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (a)
it is not purchasing any U.S. Shares (as defined below) being sold by it for the
account of anyone other than a United States or Canadian Person (as defined
below); and (b) it has not offered or sold, and will not offer or sell, directly
or indirectly, any U.S. Shares or distribute any prospectus relating to the U.S.
Shares outside the United States or Canada or to anyone other than a United
States or Canadian Person. Pursuant to the Agreement Between U.S. and
International Underwriters, each International Underwriter has represented and
agreed that, with certain exceptions, (a) it is not purchasing any International
Shares (as defined below) being sold by it for the account of any United States
or Canadian Person; and (b) it has not offered or sold, and will not offer or
sell, directly or indirectly, any International Shares or distribute any
prospectus relating to the International Shares within the United States or
Canada or to any United States or Canadian Person. With respect to any
Underwriter that is a U.S. Underwriter and an International Underwriter, the
foregoing representations and agreements (i) made by it in its capacity as a
U.S. Underwriter shall apply only to shares purchased by it in its capacity as a
U.S. Underwriter, (ii) made by it in its capacity as an International
Underwriter shall apply only to shares purchased by it in its capacity as an
International Underwriter and (iii) do not restrict its ability to distribute
any prospectus relating to the shares of CarMax Stock to any person. The
foregoing limitations do not apply to stabilization actions or to certain other
transactions specified in the Agreement Between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
national or resident of the United States or Canada or any corporation, pension,
profit-sharing or other trust or other entity organized under the laws of the
United States or Canada or of any political subdivision thereof (other than a
branch located outside the United States and Canada of any United States or
Canadian Person) and includes any United States or Canadian branch of a person
who is otherwise not a United States or Canadian Person. All shares of CarMax
Stock to be purchased by the U.S. Underwriters and the International
Underwriters under the Underwriting Agreement are referred to herein as the
"U.S. Shares" and the "International Shares," respectively.
Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of CarMax Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the Price to Public set forth on
80
<PAGE>
the cover page hereof, in United States dollars, less an amount not greater than
the per share amount of the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of CarMax Stock, directly or indirectly, in
Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of shares of CarMax Stock
in Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer is
made. Each U.S. Underwriter has further agreed to send to any dealer who
purchases from it any shares of CarMax Stock a notice stating in substance that,
by purchasing such shares of CarMax Stock, such dealer represents and agrees
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such shares of CarMax Stock in Canada or to, or for the
benefit of, any resident of Canada in contravention of the securities laws of
Canada or any province or territory thereof and that any offer of shares of
CarMax Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province of Canada in which such offer
is made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of CarMax Stock a notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (a) it has not offered
or sold and will not, during the period of six months from the date of the
Offering, offer or sell any shares of CarMax Stock in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of CarMax Stock offered hereby in, from or otherwise
involving the United Kingdom; and (c) it has only issued or passed on and will
only issue or pass on to any person in the United Kingdom any document received
by it in connection with the issue of the shares of CarMax Stock if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1988, or to any person to whom
the document may lawfully be issued or passed on.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that it has not offered or
sold, and agrees not to offer or sell, directly or indirectly, in Japan or to or
for the account of any resident thereof, any of the shares of CarMax Stock
acquired in connection with the distribution contemplated hereby, except for
offers or sales to Japanese International Underwriters or dealers and except
pursuant to an exemption from the registration requirements of the Securities
and Exchange Law of Japan. Each International Underwriter further agrees to send
to any dealer who purchases from it any of the shares of CarMax Stock a notice
stating in substance that, by purchasing such shares, such dealer represents and
agrees that it has not offered or sold and will not offer or sell any of such
shares, directly or indirectly, in Japan or to or for the account of any
resident thereof except pursuant to an exemption from the registration
requirements of the Securities and Exchange Law of Japan, and that such dealer
will send to any other dealer to whom it sells any of such shares of CarMax
Stock a notice containing substantially the same statement as contained in the
foregoing.
The Underwriters initially propose to offer part of the shares of CarMax
Stock directly to the public at the Price to Public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ a share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other Underwriters or to certain dealers. After the initial offering of
the shares of CarMax Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters.
Pursuant to the Underwriting Agreement, the Company has granted the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of 2,829,000 additional shares of
CarMax Stock at the Price to Public set forth on the cover page hereof, less
underwriting discounts and commissions. The U.S. Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the Offering. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of CarMax Stock as
the number set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of shares of CarMax Stock offered by the U.S.
Underwriters hereby.
The Company, all officers of the Company and its subsidiaries who hold
CarMax Stock Options and certain employees of the Company and its subsidiaries
who hold CarMax Stock Options have agreed in the Underwriting Agreement that,
without the prior written consent of Morgan Stanley & Co. Incorporated, they
will not (a) offer, pledge, sell, contract to sell,
81
<PAGE>
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of the CarMax Stock or any
securities convertible into or exercisable or exchangeable for the CarMax Stock
(whether such shares or any such securities are then owned by such person or are
thereafter acquired), or (b) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the CarMax Stock, whether any such transaction described in clause
(a) or (b) of this paragraph is to be settled by delivery of the CarMax Stock or
such other securities, in cash or otherwise, for a period of 180 days after the
date of this Prospectus, provided that during such 180 day period the Company
may issue shares and grant stock options and similar rights under employee
benefit plans and such officers may transfer shares by gift to persons who agree
to such restrictions. The outside directors of the Company are not subject to
the foregoing restrictions because they do not currently hold any shares of
CarMax Stock or options to acquire shares of CarMax Stock.
Prior to the Offering, there has been no public market for the CarMax
Stock. The initial public offering price will be negotiated among the Company
and the U.S. Representatives and the International Representatives. Among the
factors to be considered in determining the initial public offering price of the
CarMax Stock, in addition to prevailing market conditions, will be the CarMax
Group's historical performance, estimates of the business potential and earnings
prospects of the CarMax Groups, an assessment of the CarMax Group's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
From time to time, certain of the Underwriters and their affiliates have
provided, and may continue to provide, investment banking services to the
Company.
The Company has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
LEGAL MATTERS
The validity of the shares of CarMax Stock and the related CarMax Rights
offered hereby will be passed upon for the Company by McGuire, Woods, Battle &
Boothe, L.L.P., Richmond, Virginia. Certain legal matters will be passed upon
for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York. Simpson Thacher & Bartlett will
rely upon McGuire, Woods, Battle & Boothe, L.L.P. as to certain matters of
Virginia law. Lawyers of McGuire, Woods, Battle & Boothe, L.L.P. own
approximately 12,000 shares of the Company's existing common stock.
EXPERTS
The (i) consolidated financial statements of the Company as of February 29,
1996 and February 28, 1995, and for each of the years in the three-year period
ended February 29, 1996 included herein, (ii) financial statements of the CarMax
Group as of February 29, 1996 and February 28, 1995 and for each of the years in
the three-year period ended February 29, 1996 included herein and (iii)
financial statements of the Circuit City Group as of February 29, 1996 and
February 28, 1995, and for each of the years in the three-year period ended
February 29, 1996 incorporated by reference herein from Annex VI of the
Company's Proxy Statement filed with the Commission on December 24, 1996, have
been included or incorporated herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
82
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission also maintains a Worldwide Web site (address:
http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Common Stock of the Company is listed on the New York Stock
Exchange. Reports, proxy and information statements and other information
concerning the Company may also be inspected and copied at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York, 10005.
As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information contained in the Registration Statement on
Form S-3 (the "Registration Statement") of which this Prospectus is a part. For
such information, reference is made to the Registration Statement and the
exhibits thereto. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete; with respect
to each such contract, agreement or other document filed as an exhibit to the
Registration Statement or incorporated by reference herein, reference is made to
such contract, agreement or other document for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
such reference.
83
<PAGE>
GLOSSARY OF DEFINED TERMS
Set forth below is a list of certain defined terms used herein and the page
of this Prospectus on which each such term is defined.
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------------------ -----------------
<S> <C>
Acquiring Person............................................................................................ 73
Affiliated Transactions..................................................................................... 75
Amended Articles............................................................................................ 58
Amendments.................................................................................................. 58
Articles.................................................................................................... 58
CarMax...................................................................................................... 4
CarMax Group................................................................................................ 59
CarMax Group Available Dividend Amount...................................................................... 59
CarMax Group Companies...................................................................................... 59
CarMax Group Net Earnings (Loss)............................................................................ 60
CarMax Group Subsidiaries................................................................................... 65
CarMax Right................................................................................................ 73
CarMax Stock................................................................................................ 4
CarMax Stock Options........................................................................................ 4
CarMax Stock Proposal....................................................................................... 8
CarMax Stock Proposal Amendments............................................................................ 58
Circuit City................................................................................................ 4
Circuit City Group.......................................................................................... 60
Circuit City Group Available Dividend Amount................................................................ 59
Circuit City Group Net Earnings (Loss)...................................................................... 61
Circuit City Group Subsidiaries............................................................................. 65
Circuit City Right.......................................................................................... 73
Circuit City Stock.......................................................................................... 4
Code........................................................................................................ 78
Commission.................................................................................................. 3
Common Stock................................................................................................ 58
Common Stock Redesignation.................................................................................. 8
Company..................................................................................................... 4
Control Share Acquisition................................................................................... 76
Convertible Securities...................................................................................... 62
Disinterested Director...................................................................................... 75
Disposition................................................................................................. 61
Distribution Date........................................................................................... 73
Exchange Act................................................................................................ 3
Expiration Date............................................................................................. 73
Fair Value.................................................................................................. 62
Franchise Agreement......................................................................................... 16
Inter-Group Interest........................................................................................ I-1
Inter-Group Interest Fraction............................................................................... 11
Interested Shareholder...................................................................................... 75
Liquidation Unit............................................................................................ 10
Market Capitalization....................................................................................... 63
Market Value................................................................................................ 63
Market Value Ratio of the CarMax Stock to the Circuit City Stock............................................ 63
Market Value Ratio of the Circuit City Stock to the CarMax Stock............................................ 63
Meeting..................................................................................................... 4
Nasdaq NMS.................................................................................................. 63
Net Proceeds................................................................................................ 64
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------------------ -----------------
Number of Shares Issuable with Respect to the Inter-Group Interest.......................................... 71
<S> <C>
NYSE........................................................................................................ 23
Original Rights............................................................................................. 73
Outstanding CarMax Fraction................................................................................. 11
Ownership Trigger Date...................................................................................... 73
Principal Economic Terms.................................................................................... 74
Publicly Traded............................................................................................. 64
Redemption Price............................................................................................ 74
Related Business Transaction................................................................................ 64
Restated Rights Agreement................................................................................... 73
Rights...................................................................................................... 73
Rights Agreement............................................................................................ 73
Series E Preferred Stock.................................................................................... 58
Series F Preferred Stock.................................................................................... 73
Series E Purchase Price..................................................................................... 74
Series F Purchase Price..................................................................................... 74
Stock Incentive Plan........................................................................................ 4
Trading Day................................................................................................. 64
VSCA........................................................................................................ 18
</TABLE>
85
<PAGE>
ANNEX I
ILLUSTRATIONS OF CERTAIN TERMS
The following illustrations demonstrate the calculations of the Circuit
City Group's Inter-Group Interest in the CarMax Group based on the assumptions
set forth herein and using (i) 125 million shares as the number of shares
designated and authorized for issuance as CarMax Stock and (ii) 75.44 million
shares as the number of shares of CarMax Stock initially issuable with respect
to the Circuit City Group's Inter-Group Interest in the CarMax Group (the
"Number of Shares Issuable with Respect to the Inter-Group Interest").
Accordingly, 75.44 million shares is the number of shares of CarMax Stock that
initially represents 100% of the common shareholders' equity of the CarMax Group
("Equity Value"), without giving effect to the CarMax Stock Options. Unless
otherwise stated, each illustration below should be read independently as if
none of the other transactions referred to below had occurred.
At any time, the fractional interest in the Equity Value of the CarMax
Group that is held by the holders of the outstanding CarMax Stock (the
"Outstanding CarMax Fraction") will be equal to:
_____Outstanding Shares of CarMax Stock_____
Outstanding Shares of CarMax Stock +
Number of Shares Issuable with Respect to the
Inter-Group Interest
The balance of the Equity Value of the CarMax Group is for the account of
the Circuit City Group (the "Inter-Group Interest"), and, at any time, the
fractional interest in the Equity Value of the CarMax Group that is represented
by the Inter-Group Interest (the "Inter-Group Interest Fraction") will be equal
to:
Number of Shares Issuable with Respect to the
___________Inter-Group Interest__________
Outstanding Shares of CarMax Stock +
Number of Shares Issuable with Respect to the
Inter-Group Interest
The sum of the Outstanding CarMax Fraction and the Inter-Group Interest
Fraction will always equal 100%.
CARMAX STOCK OFFERING
The following illustration (as well as all subsequent illustrations)
assumes the sale by the Company of 18.86 million shares of CarMax Stock for the
account of the CarMax Group in the Offering.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 0
Newly issued shares of CarMax Stock................................................... 18.86 million
--------------
Total issued and outstanding after CarMax Stock Offering.............................. 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the issuance of
any shares of CarMax Stock for the account of the CarMax Group.
(Bullet) As a result of the Offering, the issued and outstanding shares of
CarMax Stock (18.86 million) would represent an Outstanding CarMax
Fraction of 20.0%, calculated as follows:
________18.86 million_______
18.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 80.0%.
(Bullet) In this case, in the event of any dividend or other distribution
paid on the outstanding shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock),
the financial statements of the Circuit City Group would be
credited, and the financial statements of the CarMax Group would
be charged, with an amount equal to 400% of the aggregate amount
of such dividend or distribution (representing the ratio of the
Number of Shares Issuable with Respect to the Inter-Group Interest
(75.44 million) to the total number of shares of CarMax Stock
issued
I-1
<PAGE>
and outstanding following the initial public offering (18.86
million)). If, for example, a dividend of $0.10 per share were
declared and paid on the 18.86 million shares of CarMax Stock
outstanding (an aggregate of $1,886,000), the Circuit City Group
financial statements would be credited with $7,544,000, and the
CarMax Group financial statements would be charged with that
amount in addition to the $1,886,000 dividend paid to the holders
of the outstanding CarMax Stock (for a total of $9,430,000).
(Bullet) Immediately after the Offering, the Company would have 106.14
million shares of CarMax Stock designated and available for
issuance (125 million less 18.86 million issued and outstanding).
FUTURE OFFERINGS OF CARMAX STOCK
The following illustrations reflect the sale by the Company of 5 million
shares of CarMax Stock after the Offering.
OFFERING FOR THE CARMAX GROUP
Assume all of such shares are identified for the account of the CarMax
Group as an additional equity interest in the CarMax Group, with the net
proceeds reflected in the financial statements of the CarMax Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 5 million
--------------
Total issued and outstanding after Offering........................................... 23.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the issuance of
any shares of CarMax Stock for the account of the CarMax Group.
(Bullet) The total issued and outstanding shares of CarMax Stock (23.86
million) would represent an Outstanding CarMax Fraction of 24.0%,
calculated as follows:
________23.86 million_______
23.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 76.0%.
(Bullet) After such future offering, in the event of any dividend or other
distribution paid on the outstanding shares of CarMax Stock (other
than a dividend or other distribution payable in shares of CarMax
Stock), the financial statements of the Circuit City Group would
be credited, and the financial statements of the CarMax Group
would be charged, with a total amount equal to 316.2% of the
aggregate amount of such dividend or distribution (representing
the ratio of the Number of Shares Issuable with Respect to the
Inter-Group Interest (75.44 million) to the total number of shares
of CarMax Stock issued and outstanding following the public
offering (23.86 million)).
(Bullet) Immediately after the Offering, the Company would have 101.14
million shares of CarMax Stock designated and available for
issuance (125 million less 23.86 million issued and outstanding).
OFFERING FOR THE CIRCUIT CITY GROUP
Assume all of such shares are identified for the account of the Circuit
City Group with respect to the Inter-Group Interest, with the net proceeds
reflected in the financial statements of the Circuit City Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 5 million
--------------
Total issued and outstanding after offering........................................... 23.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would decrease by the number of any shares of CarMax
Stock issued for the account of the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
offering............................................................................ 75.44 million
Shares issued in offering............................................................. 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after offering..... 70.44 million
--------------
--------------
</TABLE>
I-2
<PAGE>
(Bullet) The total issued and outstanding shares of CarMax Stock (23.86
million) would represent an Outstanding CarMax Fraction of 25.3%,
calculated as follows:
________23.86 million_______
23.86 million + 70.44 million
The Inter-Group Interest Fraction would accordingly be 74.7%.
(Bullet) In this case, in the event of any dividend or other distribution
paid on the outstanding shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock),
the financial statements of the Circuit City Group would be
credited, and the financial statements of the CarMax Group would
be charged, with an amount equal to 295.2% of the aggregate amount
of such dividend or distribution (representing the ratio of the
Number of Shares Issuable with Respect to the Inter-Group Interest
(70.44 million) to the total number of shares of CarMax Stock
issued and outstanding following the public offering (23.86
million)).
(Bullet) Immediately after the public offering, the Company would have
101.14 million shares of CarMax Stock designated and available for
issuance (125 million less 23.86 million issued and outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES
If the Company were to issue any debt or preferred stock convertible into
shares of CarMax Stock, the Outstanding CarMax Fraction and the Inter-Group
Interest Fraction would be unchanged at the time of such issuance. If any shares
of CarMax Stock were issued upon conversion of such convertible securities,
however, then the Outstanding CarMax Fraction and the Inter-Group Interest
Fraction would be affected as shown above under "Offering for the CarMax Group,"
if such convertible securities were allocated to the CarMax Group, or under
"Offering for the Circuit City Group," if such convertible securities were
allocated to the Circuit City Group.
CARMAX STOCK DIVIDENDS
The following illustrations reflect dividends of CarMax Stock on
outstanding CarMax Stock and outstanding Circuit City Stock, respectively, after
the Offering.
CARMAX STOCK DIVIDEND ON CARMAX STOCK
Assume the Company declares a dividend of one share of CarMax Stock on each
outstanding share of CarMax Stock.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 18.86 million
--------------
Total issued and outstanding after dividend........................................... 37.72 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased proportionately to reflect the stock
dividend payable in shares of CarMax Stock to holders of CarMax
Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
dividend........................................................................... 75.44 million
Adjustment to reflect dividend of shares on outstanding shares of CarMax Stock....... 75.44 million
---------------
Number of Shares Issuable with Respect to the Inter-Group Interest after dividend.... 150.88 million
---------------
---------------
</TABLE>
The total issued and outstanding shares of CarMax Stock (37.72 million)
would continue to represent an Outstanding CarMax Fraction of 20.0%,
calculated as follows:
________37.72 million_______
37.72 million + 150.88 million
The Inter-Group Interest Fraction accordingly would continue to be 80.0%.
(Bullet) Immediately after the dividend, the Company would have 87.28
million shares of CarMax Stock designated and available for
issuance (125 million less 37.72 million issued and outstanding).
I-3
<PAGE>
CARMAX STOCK DIVIDEND ON CIRCUIT CITY STOCK
Assume 100 million shares of Circuit City Stock are outstanding and the
Company declares a dividend of 1/10 of a share of CarMax Stock on each
outstanding share of Circuit City Stock.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 10 million
--------------
Total issued and outstanding after dividend........................................... 28.86 million
--------------
--------------
</TABLE>
(Bullet) Any dividend of shares of CarMax Stock to the holders of shares of
Circuit City Stock will be treated as a dividend of shares
issuable with respect to the Inter-Group Interest. As a result,
the Number of Shares Issuable with Respect to the Inter-Group
Interest would decrease by the number of shares of CarMax Stock
dividended to the holders of Circuit City Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
dividend............................................................................ 75.44 million
Shares dividended on outstanding shares of Circuit City Stock......................... 10 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after dividend..... 65.44 million
--------------
--------------
</TABLE>
The Company will not dividend to holders of Circuit City Stock a number
of shares of CarMax Stock exceeding the then Number of Shares Issuable
with Respect to the Inter-Group Interest.
(Bullet) The total issued and outstanding shares (28.86 million) would
represent an Outstanding Interest Fraction of 30.6%, calculated as
follows:
________28.86 million_______
28.86 million + 65.44 million
The Inter-Group Interest Fraction would accordingly be 69.4%. Note,
however, that after the dividend the holders of Circuit City Stock would
also hold 10 million shares of CarMax Stock, which would represent a
direct interest of 10.6% in the equity value of the CarMax Group (and,
together with the 69.4% Inter-Group Interest, would continue to be a
total interest in the equity value of the CarMax Group of 80.0%).
(Bullet) Immediately after the dividend, the Company would have 96.14
million shares of CarMax Stock designated and available for
issuance (125 million less 28.86 million issued and outstanding).
REPURCHASES OF CARMAX STOCK
The following illustrations reflect the repurchase by the Company of 5
million shares of CarMax Stock after the Offering.
REPURCHASE WITH CARMAX GROUP FUNDS
Assume all such shares are identified as having been repurchased with funds
allocated to the CarMax Group, with the financial statements of the CarMax Group
being charged with the consideration paid for such shares:
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Shares of CarMax Stock repurchased.................................................... 5 million
--------------
Total issued and outstanding after repurchase......................................... 13.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest (75.44 million) would not be changed by the repurchase of
any shares of CarMax Stock with funds allocated to the CarMax
Group.
(Bullet) The total issued and outstanding shares of CarMax Stock (13.86
million) would represent an Outstanding CarMax Fraction of 15.5%,
calculated as follows:
________13.86 million_______
13.86 million + 75.44 million
The Inter-Group Interest Fraction would accordingly be 84.5%.
I-4
<PAGE>
(Bullet) Immediately after the repurchase, the Company would have 111.14
million shares of CarMax Stock designated and available for
issuance (125 million less 13.86 million issued and outstanding).
REPURCHASE WITH CIRCUIT CITY GROUP FUNDS
Assume all such shares are identified as having been repurchased with funds
allocated to the Circuit City Group, with the financial statements of the
Circuit City Group being charged with the consideration paid for such shares:
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Shares of CarMax Stock repurchased.................................................... 5 million
--------------
Total issued and outstanding after repurchase......................................... 13.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased by the number of any shares of CarMax
Stock repurchased with funds allocated to the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
repurchase.......................................................................... 75.44 million
Shares repurchased with funds allocated to Circuit City Group......................... 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after repurchase... 80.44 million
--------------
--------------
</TABLE>
(Bullet) The total issued and outstanding shares of CarMax Stock (13.86
million) would represent an Outstanding CarMax Fraction of 14.7%,
calculated as follows:
________13.86 million_______
13.86 million + 80.44 million
The Inter-Group Interest Fraction would accordingly be 85.3%.
(Bullet) Immediately after the repurchase, the Company would have 111.14
million shares of CarMax Stock designated and available for
issuance (125 million less 13.86 million issued and outstanding).
TRANSFERS OF ASSETS BETWEEN GROUPS
CONTRIBUTION OF ASSETS FROM CIRCUIT CITY GROUP TO CARMAX GROUP
The following illustration reflects the contribution as additional equity
by the Circuit City Group to the CarMax Group after the Offering of $100 million
of assets attributed to the Circuit City Group on a date on which the Fair
Market Value of CarMax Stock is $20 per share.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 0
--------------
Total issued and outstanding after contribution....................................... 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be increased to reflect the contribution to the
CarMax Group of assets attributed to the Circuit City Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
contribution........................................................................ 75.44 million
Adjustment to reflect contribution to CarMax Group of assets attributed to Circuit
City Group.......................................................................... 5 million
--------------
Number of Shares Issuable with Respect to the Inter-Group Interest after
contribution........................................................................ 80.44 million
--------------
--------------
</TABLE>
I-5
<PAGE>
(Bullet) The total issued and outstanding shares of CarMax Stock (18.86
million) would represent an Outstanding CarMax Fraction of 19.0%,
calculated as follows:
________18.86 million_______
18.86 million + 80.44 million
The Inter-Group Interest Fraction would accordingly be 81.0%.
(Bullet) Immediately after the contribution, the Company would have 106.14
million shares of CarMax Stock designated and available for
issuance (125 million less 18.86 million issued and outstanding).
TRANSFER OF ASSETS FROM CARMAX GROUP TO CIRCUIT CITY GROUP
The following illustration reflects the transfer by the CarMax Group to the
Circuit City Group after the Offering of $100 million of assets attributed to
the CarMax Group on a date on which the Fair Market Value of CarMax Stock is $20
per share, assuming such transfer has been determined by the Board of Directors
to be treated as a reduction in the Circuit City Group's equity interest in the
CarMax Group.
<TABLE>
<S> <C>
Shares of CarMax Stock previously issued and outstanding.............................. 18.86 million
Newly issued shares of CarMax Stock................................................... 0
--------------
Total issued and outstanding after transfer........................................... 18.86 million
--------------
--------------
</TABLE>
(Bullet) The Number of Shares Issuable with Respect to the Inter-Group
Interest would be decreased to reflect the contribution to the
Circuit City Group of assets allocated to the CarMax Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group Interest prior to
transfer............................................................................ 75.44 million
Adjustment to reflect transfer to Circuit City Group of assets allocated to CarMax
Group............................................................................... 5 million
-------------
Number of Shares Issuable with Respect to the Inter-Group Interest after transfer..... 70.44 million
-------------
-------------
</TABLE>
The Company will not make transfers of assets of the CarMax Group to the
Circuit City Group the fair value of which exceeds the Fair Market Value
of the then Number of Shares Issuable with Respect to the Inter-Group
Interest.
(Bullet) The total issued and outstanding shares of CarMax Stock (18.86
million) would represent an Outstanding CarMax Fraction of 21.1%,
calculated as follows:
________18.86 million_______
18.86 million + 70.44 million
The Inter-Group Interest Fraction would accordingly be 78.9%.
(Bullet) Immediately after the transfer, the Company would have 106.14
million shares of CarMax Stock designated and available for
issuance (125 million less 18.86 million issued and outstanding).
I-6
<PAGE>
CARMAX GROUP FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Statements of Operations -- Years Ended February 29 or 28, 1996, 1995 and 1994....................................... F-2
Balance Sheets -- February 29 or 28, 1996 and 1995................................................................... F-3
Statements of Cash Flows -- Years Ended February 29 or 28, 1996, 1995 and 1994....................................... F-4
Statements of Accumulated Group Deficit -- Years Ended February 29 or 28, 1996, 1995 and 1994........................ F-5
Notes to Group Financial Statements.................................................................................. F-6
Report of KPMG Peat Marwick LLP, Independent Auditors................................................................ F-16
INTERIM FINANCIAL STATEMENTS
Statements of Operations -- Nine Months Ended November 30, 1996 and 1995 (unaudited)................................. F-17
Balance Sheets -- November 30, 1996 (unaudited) and February 29, 1996................................................ F-18
Statements of Cash Flows -- Nine Months Ended November 30, 1996 and 1995 (unaudited)................................. F-19
Notes to Group Financial Statements (unaudited)...................................................................... F-20
</TABLE>
F-1
<PAGE>
CARMAX GROUP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
---------------------------------------------------------
1996 % 1995 % 1994 %
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
NET SALES AND OPERATING REVENUES.................................. $275,857 100.0 $77,002 100.0 $16,176 100.0
Cost of sales..................................................... 252,284 91.4 72,147 93.7 14,202 87.8
-------- ----- ------- ----- ------- -----
GROSS PROFIT...................................................... 23,573 8.6 4,855 6.3 1,974 12.2
-------- ----- ------- ----- ------- -----
Selling, general and administrative expenses (Notes 3 and 12)..... 28,440 10.3 10,792 14.0 4,849 30.0
Interest expense (Note 7)......................................... 4,075 1.5 1,045 1.4 161 1.0
-------- ----- ------- ----- ------- -----
TOTAL EXPENSES.................................................... 32,515 11.8 11,837 15.4 5,010 31.0
-------- ----- ------- ----- ------- -----
Loss before income tax benefit.................................... 8,942 3.2 6,982 9.1 3,036 18.8
Income tax benefit (Notes 3 and 8)................................ 3,707 1.3 2,875 3.8 1,239 7.7
-------- ----- ------- ----- ------- -----
NET LOSS.......................................................... $ 5,235 1.9 $ 4,107 5.3 $ 1,797 11.1
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----
</TABLE>
See accompanying notes to group financial statements.
F-2
<PAGE>
CARMAX GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
AT FEBRUARY 29 OR 28
--------------------
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash................................................................................................ $ 2,219 $ 2,159
Net accounts receivable (Note 4).................................................................... 16,562 44,326
Inventory........................................................................................... 61,672 46,471
Prepaid expenses and other current assets........................................................... 772 589
-------- --------
TOTAL CURRENT ASSETS............................................................................. 81,225 93,545
Property and equipment, net (Notes 6 and 7)......................................................... 19,860 19,655
Deferred income taxes (Note 8)...................................................................... 1,560 1,093
-------- --------
TOTAL ASSETS..................................................................................... $102,645 $114,293
-------- --------
-------- --------
LIABILITIES AND ACCUMULATED GROUP DEFICIT
CURRENT LIABILITIES:
Accounts payable.................................................................................... $ 12,399 $ 6,476
Short-term debt (Note 7)............................................................................ 18,050 --
Deferred income taxes (Note 8)...................................................................... 2,276 699
Accrued expenses and other current liabilities...................................................... 1,164 756
-------- --------
TOTAL CURRENT LIABILITIES........................................................................ 33,889 7,931
Long-term debt (Note 7)............................................................................. 78,519 111,629
Deferred revenue and other liabilities.............................................................. 1,438 699
-------- --------
TOTAL LIABILITIES................................................................................ 113,846 120,259
-------- --------
ACCUMULATED GROUP DEFICIT............................................................................. (11,201) (5,966)
-------- --------
Commitments and contingent liabilities (Notes 1, 4, 5, 10, 11, 13 and 14)
TOTAL LIABILITIES AND ACCUMULATED GROUP DEFICIT.................................................. $102,645 $114,293
-------- --------
-------- --------
</TABLE>
See accompanying notes to group financial statements.
F-3
<PAGE>
CARMAX GROUP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss................................................................................. $ (5,235) $ (4,107) $ (1,797)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation.......................................................................... 821 259 60
Provision for deferred income taxes................................................... 1,110 412 (805)
Increase in deferred revenue and other liabilities.................................... 739 608 91
Decrease (increase) in net accounts receivable........................................ 27,764 (34,001) (8,871)
Increase in inventory, prepaid expenses and other current assets...................... (15,384) (35,720) (11,341)
Increase in accounts payable, accrued expenses and other current liabilities.......... 6,331 4,540 2,679
-------- -------- --------
Net cash provided by (used in) operating activities...................................... 16,146 (68,009) (19,984)
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment...................................................... (26,776) (32,990) (7,284)
Proceeds from sales of property and equipment............................................ 25,750 14,300 6,000
-------- -------- --------
Net cash used in investing activities.................................................... (1,026) (18,690) (1,284)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net........................................... 18,050 -- --
(Principal payments on) proceeds from issuance of long-term debt, net.................... (33,110) 87,253 22,825
-------- -------- --------
Net cash (used in) provided by financing activities...................................... (15,060) 87,253 22,825
-------- -------- --------
Increase in cash........................................................................... 60 554 1,557
Cash at beginning of year.................................................................. 2,159 1,605 48
-------- -------- --------
Cash at end of year........................................................................ $ 2,219 $ 2,159 $ 1,605
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to group financial statements.
F-4
<PAGE>
CARMAX GROUP
STATEMENTS OF ACCUMULATED GROUP DEFICIT
<TABLE>
<CAPTION>
ACCUMULATED
GROUP DEFICIT
----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
BALANCE AT MARCH 1, 1993............................................................................... $ (62)
Net loss............................................................................................... (1,797)
----------
BALANCE AT FEBRUARY 28, 1994........................................................................... (1,859)
Net loss............................................................................................... (4,107)
----------
BALANCE AT FEBRUARY 28, 1995........................................................................... (5,966)
Net loss............................................................................................... (5,235)
----------
BALANCE AT FEBRUARY 29, 1996........................................................................... $(11,201)
----------
----------
</TABLE>
See accompanying notes to group financial statements.
F-5
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Board of Directors of Circuit City Stores, Inc. (the "Company") has
adopted a proposal (the "CarMax Stock Proposal") which, if approved by
shareholders and implemented by the Board of Directors, would effect a
comprehensive plan that will result in a restructuring of the existing Common
Stock of the Company into two new series of Common Stock intended to reflect
separately the performance of the Company's two main businesses -- the used and
new car retail business (the "CarMax Group") and the consumer electronics, major
appliances, personal computer and music software retail business, including its
interest in the CarMax Group referred to below (the "Circuit City Group"). Under
the CarMax Stock Proposal, the Board of Directors would be authorized to
designate and issue shares of a new series of Common Stock to be called Circuit
City Stores, Inc. -- CarMax Group Common Stock, par value $0.50 per share
("CarMax Stock"), which is intended to reflect separately the performance of the
CarMax Group. In addition, each share of the Company's existing Common Stock
would be redesignated as a share of a new series of Common Stock to be called
Circuit City Stores, Inc. -- Circuit City Group Common Stock, par value $0.50
per share ("Circuit City Stock"), which is intended to reflect separately the
performance of the Circuit City Group, which is generally comprised of (i) the
Company's consumer electronics, major appliances, 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 or any of its
subsidiaries may be engaged (other than those comprising the CarMax Group). The
CarMax Group and the Circuit City Group are sometimes referred to collectively
as the "Groups" and individually as a "Group."
Following approval of the CarMax Stock Proposal, the Company currently
intends, subject to prevailing market and other conditions, to offer shares of
CarMax Stock initially representing 20 percent of the equity value of the CarMax
Group, without giving effect to the CarMax Stock Options, to the public for cash
in a public offering (the "Offering"). The Company intends to allocate the
proceeds of the Offering to the CarMax Group. Upon completion of the Offering,
the Circuit City Group will hold an interest (the "Inter-Group Interest") in 80
percent of the equity value of the CarMax Group.
The CarMax Group and the Circuit City Group financial statements comprise
all of the accounts included in the corresponding consolidated financial
statements of the Company. The separate Group financial statements give effect
to the management and allocation policies adopted by the Board of Directors, as
described under "Corporate Activities" below. The CarMax Group financial
statements have been prepared on a basis that management believes to be
reasonable and appropriate and include (i) the historical financial position,
results of operations and cash flows of the CarMax Group, (ii) an allocated
portion of the Company's debt, including the related effects upon results of
operations and cash flow and (iii) an allocated portion of the Company's
corporate general and administrative costs.
If the CarMax Stock Proposal is approved and implemented, the Company will
provide to holders of both CarMax Stock and Circuit City Stock separate
financial statements, management's discussion and analysis of results of
operations and financial condition, description of business and other relevant
information for the CarMax Group, the Circuit City Group and the Company.
Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the CarMax
Group and the Circuit City Group for the purposes of preparing their respective
financial statements, holders of CarMax Stock and holders of Circuit City Stock
will be shareholders of the Company and will continue to be subject to all of
the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Such attribution and the change in the
equity structure of the Company contemplated by the CarMax Stock Proposal will
not affect title to the assets or responsibility for the liabilities of the
Company or any of its subsidiaries. As a result, the CarMax Stock Proposal will
not affect the rights of holders of the Company's or any of its subsidiaries'
debt. The results of operations or financial condition of either Group could
affect the results of operations or financial condition of the other Group and
the market price of the series of Common Stock relating to that Group. In
addition, any net losses of the CarMax Group or the Circuit City Group and
dividends or distributions on, or repurchases of, CarMax Stock or Circuit City
Stock will reduce the assets of the Company legally available for payment of
dividends on both the CarMax Stock and the Circuit City Stock. Accordingly, the
CarMax Group's financial information should be read in conjunction with the
Company's consolidated financial information and the Circuit City Group's
financial information.
F-6
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
1. BASIS OF PRESENTATION -- Continued
The management and allocation policies applicable to the preparation of the
financial statements of the CarMax Group and the Circuit City Group may be
modified or rescinded, or additional policies may be adopted, at the sole
discretion of the Board of Directors without approval of the shareholders,
although the Board of Directors has no present plans to do so. Any determination
of the Board of Directors to modify or rescind such policies, or to adopt
additional policies, including any such decision that would have disparate
effects upon holders of CarMax Stock and holders of Circuit City Stock, would be
made by the Board of Directors in its good faith business judgment of the
Company's best interests, taking into consideration the interests of all common
shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) INSTALLMENT AUTO LOAN RECEIVABLES
Installment auto loan receivables ("installment receivables") held for
investment are stated at cost. Installment receivables held for sale are stated
at the lower of cost or market. As of February 29, 1996, and February 28, 1995,
cost approximates market.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company enters into financial instruments on behalf of the CarMax
Group. The carrying value of the CarMax Group's financial instruments, excluding
interest rate swap agreements ("swaps"), approximates fair value due to variable
interest rates on long-term debt and the short-term maturities of the assets and
other liabilities. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. Credit risk is mitigated by dealing
only with counterparties that are highly rated by several financial rating
agencies. Accordingly, the CarMax Group does not anticipate loss for
nonperformance. All financial instruments are diversified along industry,
product and geographic areas. As discussed in Note 5, swaps are not held for
trading purposes and, therefore, are not carried at fair value.
(C) INVENTORY
Inventory is stated at the lower of cost or market. Vehicle inventory cost
is determined by specific identification. Parts and labor used to recondition
vehicles, as well as transportation and other incremental expenses associated
with acquiring vehicles, are included in inventory.
(D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the assets'
estimated useful lives, which range from three to 15 years.
(E) PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are deferred and
amortized ratably over the period from the date of the store opening to the end
of the fiscal year.
(F) INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred
income taxes reflect the impact of temporary differences between the amounts of
assets and liabilities recognized for financial reporting purposes and the
amounts recognized for income tax purposes, measured by applying currently
enacted tax laws. A deferred tax asset is recognized if it is more likely than
not that a benefit will be realized.
F-7
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(G) DEFERRED REVENUE
The CarMax Group sells its own service policies and service policies on
behalf of unrelated third parties. Policies usually have terms of coverage
between 12 and 72 months. All revenue from the sale of the CarMax Group's own
service policies is deferred and amortized over the life of the policies
consistent with the pattern of repair experience of the industry. Incremental
direct contract costs related to the sale of policies are deferred and charged
to expense in proportion to the revenue recognized. All other costs are charged
to expense as incurred. Commission revenue for the unrelated third-party service
policies is recognized at the time of sale.
(H) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating profits generated by FNAC are recorded as a reduction to selling,
general and administrative expenses.
(I) ADVERTISING EXPENSES
All advertising costs are expensed as incurred.
(J) EARNINGS OR LOSS PER SHARE
Historical loss per share is omitted from the statements of operations
since the CarMax Stock was not part of the capital structure of the Company for
the periods presented. Following implementation of the CarMax Stock Proposal,
the method of calculating earnings per share for the CarMax Group would reflect
the terms of the proposed amendments to the Company's Amended and Restated
Articles of Incorporation and would be computed by dividing the product of (i)
earnings or losses of the CarMax Group and (ii) the "Outstanding CarMax
Fraction" by the weighted average number of shares of CarMax Stock and dilutive
CarMax Stock equivalents outstanding during the applicable period. The
"Outstanding CarMax Fraction" is the fractional interest in earnings or losses
of the CarMax Group and the equity of the CarMax Group that is represented by
the shares of CarMax Stock that are outstanding at any particular time, and is
equal to a fraction the numerator of which is such number of shares of CarMax
Stock outstanding and the denominator of which is the number of shares of CarMax
Stock that, if issued, would represent 100 percent of the equity of the CarMax
Group.
(K) RISKS AND UNCERTAINTIES
The diversity of the CarMax Group's customers and suppliers reduces the
risk that a severe impact will occur in the near term as a result of changes in
its customer base, competition or sources of supply. The CarMax Group operations
currently are concentrated in the southeastern United States. A severe economic
downturn in the southeastern United States could negatively impact the CarMax
Group's operating results. Due to the CarMax Group's geographic concentration
and limited overall size, management cannot assure that unanticipated events
will not have a negative impact on the Group.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(L) RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
classifications adopted in fiscal 1996.
3. CORPORATE ACTIVITIES
The CarMax Group's financial statements reflect the application of the
management and allocation policies adopted by the Board of Directors to various
corporate activities, as described below.
(A) FINANCIAL ACTIVITIES
Most financial activities are managed by the Company on a centralized
basis. Such financial activities include the investment of surplus cash and the
issuance and repayment of short-term and long-term debt.
F-8
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
3. CORPORATE ACTIVITIES -- Continued
(B) DEBT AND INTEREST EXPENSE
Allocated debt of the CarMax Group consists of (i) Company debt, if any,
that has been allocated in its entirety to the CarMax Group and (ii) a portion
of the Company's debt that is allocated between the Circuit City Group and the
CarMax Group ("pooled debt"). For the periods covered by the CarMax Group's
financial statements, all debt consists of an allocated portion of the pooled
debt. The pooled debt bears interest at a rate based on the weighted average
interest rate of such debt calculated on a periodic basis and applied to the
average pooled debt balance. Expenses related to increases in pooled debt are
reflected in the weighted average interest rate of such pooled debt as a whole.
(C) CORPORATE GENERAL AND ADMINISTRATIVE COSTS
Corporate general and administrative costs and other shared services
generally have been allocated to the CarMax Group based upon utilization of such
services by the CarMax Group. Where determinations based on utilization alone
have been impracticable, other methods and criteria were used that management
believes are equitable and provide a reasonable estimate of the cost
attributable to the CarMax Group.
(D) INCOME TAXES
The CarMax Group is included in the consolidated federal income tax return
filed by the Company. Accordingly, the provision for federal income taxes and
related payments of tax are determined on a consolidated basis. The financial
statement provision and the related tax payments or refunds are reflected in the
Circuit City Group's and the CarMax Group's financial statements in accordance
with the Company's tax allocation policy for such Groups. In general, this
policy provides that the consolidated tax provision and related tax payments or
refunds will be allocated between the Circuit City Group and the CarMax Group
based principally upon the financial income, taxable income, credits and other
amounts directly related to the respective Group. Tax benefits that cannot be
used by the Group generating such attributes, but can be utilized on a
consolidated basis, are allocated to the Group that generated such benefits. As
a result, the allocated group amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if the Groups had filed
separate tax returns.
4. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS
Accounts receivable consist of the following at February 29 or 28:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Trade receivables.......................................... $ 4,001 $ 340
Installment receivables held for sale...................... 6,941 44,292
Installment receivables held for investment................ 6,065 --
------- -------
17,007 44,632
Less allowance for doubtful accounts....................... 445 306
------- -------
Net accounts receivable.................................... $16,562 $44,326
------- -------
------- -------
</TABLE>
In fiscal 1996, the Company entered into a securitization transaction on
behalf of the CarMax Group to finance the installment receivables generated by
First North American Credit ("FNAC,") the Group's installment lending division.
No gain or loss has been recorded on this sale. Proceeds from the auto loan
securitization transaction were $87 million during fiscal 1996. At February 29,
1996, the following amounts were outstanding:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables....................................................... $ 93,065
Interest retained by CarMax Group............................................. (6,065)
--------
Net receivables transferred with recourse..................................... $ 87,000
--------
--------
Program capacity.............................................................. $100,000
--------
--------
</TABLE>
F-9
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
4. ACCOUNTS RECEIVABLE AND SECURITIZATION TRANSACTIONS -- Continued
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. The securitization agreement
provides recourse to the Company for any cash flow deficiencies if the monthly
auto loan installment cash flows from finance charges are inadequate to cover
such expenses. The CarMax Group believes that as of February 29, 1996, no
liability existed under the recourse provision. As of April 1, 1996, the program
capacity increased to $125 million. FNAC's servicing revenue totalled $2.0
million for fiscal 1996, $2.0 million for fiscal 1995 and $0.4 million for
fiscal 1994.
5. INTEREST RATE SWAP
In November 1995, the Company entered into a 50-month amortizing swap on
behalf of the CarMax Group in the notional amount of $75 million relating to the
auto loan receivable securitization to convert variable-rate financing costs to
a fixed-rate obligation. The underlying receivables are issued with a fixed-rate
finance charge. The swap was put in place to better match the variable funding
costs to the receivables being securitized and to preserve net portfolio yield.
Recording the swap at fair value at February 29, 1996, would result in a loss of
$0.3 million.
The market and credit risks associated with this swap are similar to those
relating to other types of financial instruments. Market risk is the exposure
created by potential fluctuations in interest rates and is directly related to
the product type, agreement terms and transaction volume. The CarMax Group does
not anticipate significant market risk from swaps, since their use is to more
closely match funding costs to the use of the funding. Credit risk is the
exposure created by potential nonperformance of another party to an agreement.
Credit risk is mitigated by dealing with highly rated counterparties.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Land....................................................... $ 3,826 $ --
Construction in progress................................... 9,190 17,114
Furniture, fixtures and equipment (3 to 8 years)........... 5,515 2,173
Leasehold improvements (10 to 15 years).................... 2,461 682
------- -------
20,992 19,969
Less accumulated depreciation.............................. 1,132 314
------- -------
Property and equipment, net................................ $19,860 $19,655
------- -------
------- -------
</TABLE>
7. DEBT
Long-term pooled debt of the Company at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Term loans........................................................ $275,000 $100,000
Short-term debt expected to be refinanced......................... 100,000 53,000
-------- --------
Total long-term debt.............................................. $375,000 $153,000
-------- --------
-------- --------
Portion of long-term debt allocated to CarMax Group............... $ 78,519 $111,629
-------- --------
-------- --------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. Principal is due in full at maturity with interest
payable periodically at LIBOR plus 0.50 percent. At February 29, 1996, the
interest rate on the term loan was 5.88 percent.
F-10
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
7. DEBT -- Continued
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 1996, the interest rate
on the term loan was 5.65 percent.
The Company has the intent and ability to refinance the $100,000,000 of
short-term committed and uncommitted bank borrowings on a long-term basis by
entering into a multi-year term loan with a group of banks. Consequently, the
Company has classified the short-term debt as long-term for financial reporting
purposes. The existing revolving credit agreement could be used for this
purpose, although the Company does not currently intend to do so.
The Company maintains a multi-year, $100,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on
certain money market rates and a commitment fee of 0.13 percent per annum. The
agreement was entered into as of June 30, 1992, was amended and restated as of
June 30, 1995, and terminates June 30, 2000. The agreement provides for annual
one-year extensions of the final maturity beginning on or before June 30, 1996,
and each June 30 thereafter. No amounts were outstanding under the revolving
credit agreement at February 29, 1996, or February 28, 1995.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 29, 1996, and February 28, 1995.
Short-term debt of the Company includes committed lines of credit and
informal credit arrangements. Amounts outstanding and committed lines of credit
available are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Average short-term debt outstanding.................. $185,789 $134,022 $ 77,392
-------- -------- --------
Maximum short-term debt outstanding.................. $479,000 $465,000 $355,000
-------- -------- --------
-------- -------- --------
Aggregate committed lines of credit.................. $255,000 $285,000 $145,000
-------- -------- --------
-------- -------- --------
</TABLE>
Short-term debt allocated to the CarMax Group at February 29, 1996, was
$18,050,000. The weighted average interest rate on the outstanding short-term
debt was 5.9 percent during fiscal 1996, 5.3 percent during fiscal 1995 and 3.3
percent during fiscal 1994.
Interest expense allocated by the Company to the CarMax Group, excluding
interest capitalized, was $4,074,737, $1,045,153 and $161,472 in fiscal 1996,
1995 and 1994, respectively.
The CarMax Group capitalizes interest in connection with the construction
of certain facilities. In fiscal 1996, interest capitalized amounted to
$1,314,000 ($176,000 and $119,000 in fiscal 1995 and 1994, respectively).
Concurrent with the funding of the $175,000,000 term loan facility in May
1995, the Company entered into five-year swaps with notional amounts aggregating
$175,000,000. These swaps effectively converted the variable-rate obligation
into a fixed-rate obligation. The fair value of the swaps is the amount at which
they could be settled. This value is based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, would result
in a loss of $2,500,000.
F-11
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
8. INCOME TAXES
The components of the income tax benefit on loss before income tax benefit
follow:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Current:
Federal............................................................. $(3,670) $(2,536) $ (341)
State............................................................... (1,147) (751) (93)
------- ------- -------
(4,817) (3,287) (434)
------- ------- -------
Deferred:
Federal............................................................. 844 316 (631)
State............................................................... 266 96 (174)
------- ------- -------
1,110 412 (805)
------- ------- -------
Income tax benefit.................................................... $(3,707) $(2,875) $(1,239)
------- ------- -------
------- ------- -------
</TABLE>
The effective income tax rate differed from the Federal statutory income
tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate............................................ 35.0% 35.0% 35.0%
State and local income taxes, net of Federal benefit......................... 6.5 6.2 5.8
---- ---- ----
Effective income tax rate.................................................... 41.5% 41.2% 40.8%
---- ---- ----
---- ---- ----
</TABLE>
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 29, 1996, and February 28, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue............................................ $1,820 $ 990
Organization cost capitalization............................ 92 182
Accrued expenses............................................ -- 86
Other....................................................... -- 3
------ ------
Total gross deferred tax assets.......................... 1,912 1,261
------ ------
Deferred Tax Liabilities:
Depreciation................................................ 352 168
Prepaid expenses............................................ 365 257
Inventory capitalization.................................... 1,907 442
Other....................................................... 4 --
------ ------
Total gross deferred tax liabilities..................... 2,628 867
------ ------
Net deferred tax (liability) asset............................ $ (716) $ 394
------ ------
------ ------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies. Based on these considerations, management
believes that it is more likely than not that the gross deferred tax assets at
February 29, 1996, and February 28, 1995, will be realized by the CarMax Group;
therefore, no valuation allowance is necessary.
F-12
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
9. STOCK INCENTIVE PLAN
As of February 29, 1996, there were outstanding options to purchase shares
of stock representing approximately 5% of the corporate entity comprising the
CarMax Group. These options are held by management and key employees of the
CarMax Group and vest evenly on the third, fourth, and fifth anniversary of the
grant date. The exercise price is equal to, or greater than, the fair market
value of the stock at the date of grant.
If the CarMax Stock Proposal is approved by the shareholders and
implemented by the Board of Directors, management intends to convert these
options into options to purchase CarMax Group stock. While the issuance of
additional shares will reduce the ownership percentage, the aggregate intrinsic
value of the options will be preserved. In addition, the vesting provisions and
option periods of the original grant will remain the same when converted.
10. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of the program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of the
Company's common stock at February 29, 1996, and February 28, 1995.
Eligible employees of the CarMax Group participate in the Company's plan.
Pension costs for these employees have been allocated to the CarMax Group based
on its proportionate share of the projected benefit obligation.
The components of net pension expense for the CarMax Group are as follows
(pension activity related to fiscal 1994 was not material):
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29 OR 28
-------------------
1996 1995
---- ----
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Service cost of benefits earned during the year................... $140 $34
Interest cost on projected benefit obligation..................... 26 5
Actual return on plan assets...................................... (128) (1)
Net amortization.................................................. 87 (18)
---- ----
Net pension expense............................................... $125 $20
---- ----
---- ----
</TABLE>
F-13
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
10. PENSION PLAN -- Continued
The following table sets forth the CarMax Group's share of the plan's
financial status and amounts recognized in the balance sheets as of February 29
or 28:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested........................................................ $ 242 $ 45
Non-vested.................................................... 32 7
----- -----
Total benefits.................................................. 274 52
Additional amounts related to projected
salary increases.............................................. 215 41
----- -----
Projected benefit obligation for services
rendered to date.............................................. 489 93
Plan assets at fair value....................................... (649) (194)
----- -----
Plan assets in excess of projected
benefit obligation............................................ (160) (101)
Unrecognized loss from past experience.......................... (195) (43)
Unrecognized prior service cost................................. 12 5
Unrecognized net obligation being
recognized over 15 years...................................... 17 7
----- -----
Prepaid pension cost............................................ $(326) $(132)
----- -----
----- -----
</TABLE>
Assumptions used in the accounting for the pension plan were:
<TABLE>
<CAPTION>
YEARS ENDED
FEBRUARY 29 OR 28
-----------------
1996 1995
---- ----
<S> <C> <C>
Weighted average discount rate........................................ 7.0 % 8.0 %
Rate of increase in compensation levels............................... 6.0 % 6.5 %
Rate of return on plan assets......................................... 9.0 % 8.0 %
---- ----
</TABLE>
11. LEASE COMMITMENTS
The CarMax Group conducts substantially all of its business in leased
premises. The CarMax Group's lease obligations are based upon contractual
minimum rates. Rental expenses for all operating leases were $3,850,000,
$1,030,000 and $189,000 in fiscal 1996, 1995 and 1994, respectively.
Most leases provide that the CarMax Group pay taxes, maintenance, insurance
and certain other operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 22
years; however, most of the leases have options providing for additional lease
terms of from eight years to 28 years at terms substantially the same as the
initial terms.
F-14
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS -- CONTINUED
11. LEASE COMMITMENTS -- Continued
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the CarMax Group, as of February 29, 1996, were:
<TABLE>
<CAPTION>
OPERATING LEASE
FISCAL COMMITMENTS
- ------------------------------------------------------------------- ----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
1997............................................................... $ 4,864
1998............................................................... 4,823
1999............................................................... 4,821
2000............................................................... 4,696
2001............................................................... 4,657
After 2001......................................................... 70,551
----------
Total minimum lease payments....................................... $ 94,412
----------
----------
</TABLE>
In fiscal 1996, the Company entered into sale-leaseback transactions on
behalf of the CarMax Group with unrelated parties at an aggregate selling price
of $25,750,000 ($14,300,000 in fiscal 1995 and $6,000,000 in fiscal 1994).
Neither the Company nor the CarMax Group has continuing involvement under the
sale-leaseback transactions.
12. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying statements of operations, amounted
to $7,154,000, $2,202,000 and $703,000 (2.6 percent, 2.9 percent and 4.3 percent
of net sales and operating revenues) in fiscal years 1996, 1995 and 1994,
respectively.
13. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the CarMax Group's evaluation of the information
presently available, management believes that the ultimate resolution of any
such proceedings will not have a material adverse effect on the CarMax Group's
financial position, liquidity or results of operation.
14. SUBSEQUENT EVENT
OfficeMax, Inc. has filed suit accusing the Company of infringing
OfficeMax, Inc.'s trademark rights by using the mark CARMAX. The Company denies
such allegations and believes that the CarMax Group's use and registration of
the mark CARMAX and other marks containing MAX do not violate any rights of
OfficeMax, Inc. The Company has filed a complaint requesting, among other
things, that certain of OfficeMax, Inc.'s marks be cancelled or declared void.
OfficeMax, Inc. has filed a similar complaint against the Company. Although it
is not possible to predict the outcome of this litigation, the Company believes
that OfficeMax, Inc.'s position and suit are without merit.
F-15
<PAGE>
CARMAX GROUP
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CIRCUIT CITY STORES, INC.:
We have audited the accompanying balance sheets of the CarMax Group (as
defined in Note 1) as of February 29, 1996 and February 28, 1995 and the related
statements of operations, accumulated group deficit and cash flows for each of
the fiscal years in the three-year period ended February 29, 1996. These
financial statements are the responsibility of Circuit City Stores, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the CarMax Group as of
February 29, 1996 and February 28, 1995 and the results of its operations and
its cash flows for each of the fiscal years in the three-year period ended
February 29, 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick
Richmond, Virginia
October 25, 1996
F-16
<PAGE>
CARMAX GROUP
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
---------------------------------------
<S> <C> <C> <C> <C>
1996 % 1995 %
--------- ------ --------- ------
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
NET SALES AND OPERATING REVENUES.................................................... $ 375,319 100.0 $ 203,149 100.0
Cost of sales....................................................................... 343,998 91.6 185,980 91.5
--------- ------ --------- ------
GROSS PROFIT........................................................................ 31,321 8.4 17,169 8.5
--------- ------ --------- ------
Selling, general and administrative expenses........................................ 34,842 9.3 20,857 10.3
Interest expense.................................................................... 4,211 1.1 2,994 1.5
--------- ------ --------- ------
TOTAL EXPENSES...................................................................... 39,053 10.4 23,851 11.8
--------- ------ --------- ------
Loss before income tax benefit...................................................... 7,732 2.0 6,682 3.3
Income tax benefit.................................................................. 3,209 0.8 2,773 1.4
--------- ------ --------- ------
NET LOSS............................................................................ $ 4,523 1.2 3,909 1.9
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
See accompanying notes to group financial statements.
F-17
<PAGE>
CARMAX GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
NOV. 30, 1996 FEB. 29, 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................................... $ 8,821 $ 2,219
Net accounts receivable........................................................................ 26,205 16,562
Inventory...................................................................................... 69,234 61,672
Prepaid expenses and other current assets...................................................... 2,544 772
------------- -------------
TOTAL CURRENT ASSETS........................................................................ 106,804 81,225
Property and equipment, net.................................................................... 73,622 19,860
Deferred income taxes.......................................................................... 1,263 1,560
Other assets................................................................................... 2,188 --
------------- -------------
TOTAL ASSETS................................................................................ $ 183,877 $ 102,645
------------- -------------
------------- -------------
LIABILITIES AND ACCUMULATED GROUP DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................................................... $ 19,125 $ 12,399
Short-term debt................................................................................ 99,758 18,050
Deferred income taxes.......................................................................... 3,443 2,276
Accrued expenses and other current liabilities................................................. 2,421 1,164
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 124,747 33,889
Long-term debt................................................................................. 72,566 78,519
Deferred revenue and other liabilities......................................................... 2,288 1,438
------------- -------------
TOTAL LIABILITIES........................................................................... 199,601 113,846
------------- -------------
ACCUMULATED GROUP DEFICIT........................................................................ (15,724) (11,201)
------------- -------------
TOTAL LIABILITIES AND ACCUMULATED GROUP DEFICIT............................................. $ 183,877 $ 102,645
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to group financial statements.
F-18
<PAGE>
CARMAX GROUP
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
--------------------
<S> <C> <C>
1996 1995
-------- --------
<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................................................. $ (4,523) $ (3,909)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation...................................................................................... 1,307 600
Provision for deferred income taxes............................................................... 1,464 835
Increase in deferred revenue and other liabilities................................................ 850 592
(Increase) decrease in net accounts receivable.................................................... (9,643) 27,420
(Increase) decrease in inventory, prepaid expenses and other current assets....................... (9,334) 5,317
Increase in other assets.......................................................................... (2,188) --
Increase in accounts payable, accrued expenses and other current liabilities...................... 7,983 1,588
-------- --------
Net cash (used in) provided by operating activities.................................................. (14,084) 32,443
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................................. (60,505) (18,719)
Proceeds from sales of property and equipment........................................................ 5,436 15,800
-------- --------
Net cash used in investing activities................................................................ (55,069) (2,919)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net....................................................... 81,708 42,957
Principal payments on long-term debt, net............................................................ (5,953) (72,166)
-------- --------
Net cash provided by (used in) financing activities.................................................. 75,755 (29,209)
-------- --------
Increase in cash....................................................................................... 6,602 315
Cash at beginning of year.............................................................................. 2,219 2,159
-------- --------
Cash at end of period.................................................................................. $ 8,821 $ 2,474
-------- --------
-------- --------
</TABLE>
See accompanying notes to group financial statements.
F-19
<PAGE>
CARMAX GROUP
NOTES TO GROUP FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The group financial statements of the CarMax Group conform to generally
accepted accounting principles. The interim period group financial statements
are unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim group financial statements have been included. The
fiscal year-end balance sheet data were derived from audited group financial
statements. The financial statements included herein should be read in
conjunction with the notes to group financial statements included in the CarMax
Group's 1996 annual financial statements.
2. DEBT
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150 million
unsecured revolving credit agreement with a group of banks. This facility
replaced a similar $100 million facility.
At November 30, 1996, $150 million was drawn on the Company's unsecured
revolving bank credit facility and has been included in the Company's short-term
debt.
3. INTEREST RATE SWAPS
The Company entered into a new 40-month amortizing swap relating to the
CarMax Group's auto loan receivable securitization during the third quarter with
a notional amount of approximately $63 million. Including this new swap,
recording the CarMax Group's interest rate swaps at fair value at November 30,
1996, would result in a loss of approximately $546,000 compared to a loss of
$300,000 at February 29, 1996. The notional amount of the swaps was
approximately $123 million at November 30, 1996, and $75 million at February 29,
1996.
4. SERVICING REVENUE
FNAC's servicing revenue, including gain on sale of receivables in fiscal
1997, totalled $5.8 million for the nine months ended November 30, 1996, and
$1.3 million for the nine months ended November 30, 1995.
F-20
<PAGE>
COMPANY FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ANNUAL FINANCIAL STATEMENTS
Consolidated Statements of Earnings -- Years Ended February 29 or 28, 1996, 1995 and 1994........................... F-22
Consolidated Balance Sheets -- February 29 or 28, 1996 and 1995..................................................... F-23
Consolidated Statements of Cash Flows -- Years Ended February 29 or 28, 1996, 1995 and 1994......................... F-24
Consolidated Statements of Stockholders' Equity -- Years Ended February 29 or 28, 1996, 1995 and 1994............... F-25
Notes to Consolidated Financial Statements.......................................................................... F-26
Report of KPMG Peat Marwick LLP, Independent Auditors............................................................... F-36
INTERIM FINANCIAL STATEMENTS
Consolidated Statements of Earnings -- Three and Nine Months Ended November 30, 1996 and 1995 (unaudited)........... F-37
Consolidated Balance Sheets -- November 30, 1996 (unaudited) and February 29, 1996.................................. F-38
Consolidated Statements of Cash Flows -- Nine Months Ended November 30, 1996 and 1995 (unaudited)................... F-39
Notes to Consolidated Financial Statements (unaudited).............................................................. F-40
</TABLE>
F-21
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-----------------------------------------------------------------
1996 % 1995 % 1994 %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating revenues.......................... $7,029,123 100.0 $5,582,947 100.0 $4,130,415 100.0
Cost of sales, buying and warehousing..................... 5,394,293 76.7 4,197,947 75.2 3,024,759 73.2
---------- ----- ---------- ----- ---------- -----
Gross profit.............................................. 1,634,830 23.3 1,385,000 24.8 1,105,656 26.8
---------- ----- ---------- ----- ---------- -----
Selling, general and administrative expenses (Note 8)..... 1,322,430 18.8 1,106,370 19.8 891,865 21.6
Interest expense (Note 3)................................. 25,400 0.4 10,030 0.2 4,791 0.1
---------- ----- ---------- ----- ---------- -----
Total expenses............................................ 1,347,830 19.2 1,116,400 20.0 896,656 21.7
---------- ----- ---------- ----- ---------- -----
Earnings before income taxes.............................. 287,000 4.1 268,600 4.8 209,000 5.1
Provision for income taxes (Note 4)....................... 107,625 1.5 100,725 1.8 76,600 1.9
---------- ----- ---------- ----- ---------- -----
Net earnings.............................................. $ 179,375 2.6 $ 167,875 3.0 $ 132,400 3.2
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
Weighted average common shares and common share
equivalents............................................. 98,546 97,369 97,391
---------- ---------- ----------
---------- ---------- ----------
Net earnings per share.................................... $ 1.82 $ 1.72 $ 1.36
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT FEBRUARY 29 OR 28
------------------------
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 43,704 $ 46,962
Net accounts and notes receivable (Note 9)...................................................... 324,395 264,565
Merchandise inventory........................................................................... 1,323,183 1,035,776
Deferred income taxes (Note 4).................................................................. 26,996 25,696
Prepaid expenses and other current assets....................................................... 17,399 14,162
---------- ----------
TOTAL CURRENT ASSETS......................................................................... 1,735,677 1,387,161
Property and equipment, net (Notes 2 and 3)..................................................... 774,265 592,956
Deferred income taxes (Note 4).................................................................. -- 5,947
Other assets.................................................................................... 16,080 17,991
---------- ----------
TOTAL ASSETS................................................................................. $2,526,022 $2,004,055
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt (Notes 3 and 7).......................................... $ 1,436 $ 2,378
Accounts payable................................................................................ 604,488 576,578
Short-term debt................................................................................. 92,087 --
Accrued expenses and other current liabilities.................................................. 123,789 113,631
Accrued income taxes............................................................................ 9,375 13,533
---------- ----------
TOTAL CURRENT LIABILITIES.................................................................... 831,175 706,120
Long-term debt, excluding current installments (Notes 3 and 7).................................. 399,161 178,605
Deferred revenue and other liabilities.......................................................... 214,001 241,866
Deferred income taxes (Note 4).................................................................. 17,764 --
---------- ----------
TOTAL LIABILITIES............................................................................ 1,462,101 1,126,591
---------- ----------
STOCKHOLDERS' EQUITY (Note 5):
Common stock, $0.50 par value; 150,000,000 shares authorized;
97,380,000 shares issued and outstanding (96,476,000 in 1995)................................ 48,690 48,238
Capital in excess of par value.................................................................. 90,432 72,639
Retained earnings............................................................................... 924,799 756,587
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................................................................... 1,063,921 877,464
---------- ----------
Commitments and contingent liabilities (Notes 6, 7, 9, 10 and 11)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................................ $2,526,022 $2,004,055
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings........................................................................... $179,375 $167,875 $132,400
Adjustments to reconcile net earnings to net cash (used in) provided by operating
activities:
Depreciation and amortization....................................................... 79,812 66,866 55,012
Loss on sales of property and equipment............................................. 5,600 2,199 1,910
Provision for deferred income taxes................................................. 22,411 73,745 (17,800)
(Decrease) increase in deferred revenue and other liabilities....................... (27,865) (26,494) 36,306
Increase in net accounts and notes receivable....................................... (59,830) (75,575) (68,542)
Increase in merchandise inventory, prepaid expenses and other current assets........ (290,644) (317,114) (203,783)
Decrease (increase) in other assets................................................. 1,911 (3,819) (522)
Increase in accounts payable, accrued expenses and other current liabilities, and
accrued income taxes............................................................... 33,910 159,297 173,300
-------- -------- --------
Net cash (used in) provided by operating activities.................................... (55,320) 46,980 108,281
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment.................................................... (518,175) (375,406) (252,256)
Proceeds from sales of property and equipment.......................................... 251,454 151,481 128,029
-------- -------- --------
Net cash used in investing activities.................................................. (266,721) (223,925) (124,227)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt.............................................. 92,087 -- --
Proceeds from issuance of long-term debt............................................... 222,000 153,000 --
Principal payments on long-term debt................................................... (2,386) (3,484) (52,748)
Proceeds from issuance of common stock, net............................................ 18,245 8,352 10,150
Dividends paid......................................................................... (11,163) (9,155) (7,674)
-------- -------- --------
Net cash provided by (used in) financing activities.................................... 318,783 148,713 (50,272)
-------- -------- --------
Decrease in cash and cash equivalents.................................................... (3,258) (28,232) (66,218)
Cash and cash equivalents at beginning of year........................................... 46,962 75,194 141,412
-------- -------- --------
Cash and cash equivalents at end of year................................................. $ 43,704 $ 46,962 $ 75,194
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................................... $ 22,905 $ 8,150 $ 5,297
Income taxes........................................................................... $ 88,477 $ 98,894 $ 81,773
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON CAPITAL IN
SHARES COMMON EXCESS OF RETAINED
OUTSTANDING STOCK PAR VALUE EARNINGS TOTAL
----------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
BALANCE AT MARCH 1, 1993....................................... 95,670 $47,835 $ 54,540 $473,141 $ 575,516
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 132,400 132,400
Exercise of common stock options (Note 5).................... 316 158 2,994 -- 3,152
Shares issued under Employee Stock Purchase Plan (Note 5).... 76 38 1,895 -- 1,933
Shares issued under the 1988 Stock Incentive Plan (Note 5)... 146 73 3,589 -- 3,662
Tax benefit from stock issued................................ -- -- 3,367 -- 3,367
Shares cancelled upon reacquisition by Company............... (128) (64) (2,014) -- (2,078)
Unearned compensation-restricted stock (Note 5).............. -- -- 114 -- 114
Cash dividends-common stock ($0.08 per share)................ -- -- -- (7,674) (7,674)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 28, 1994................................... 96,080 48,040 64,485 597,867 710,392
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 167,875 167,875
Exercise of common stock options (Note 5).................... 260 130 2,519 -- 2,649
Shares issued under Employee Stock Purchase Plan (Note 5).... 87 43 1,868 -- 1,911
Shares issued under the 1994 Stock Incentive Plan (Note 5)... 211 106 3,740 -- 3,846
Tax benefit from stock issued................................ -- -- 3,272 -- 3,272
Shares cancelled upon reacquisition by Company............... (162) (81) (3,089) -- (3,170)
Unearned compensation-restricted stock (Note 5).............. -- -- (156) -- (156)
Cash dividends-common stock ($0.10 per share)................ -- -- -- (9,155) (9,155)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 28, 1995................................... 96,476 48,238 72,639 756,587 877,464
----------- ------- ---------- -------- ----------
Net earnings................................................. -- -- -- 179,375 179,375
Exercise of common stock options (Note 5).................... 645 322 7,831 -- 8,153
Shares issued under Employee Stock Purchase Plan (Note 5).... 75 38 2,174 -- 2,212
Shares issued under the 1994 Stock Incentive Plan (Note 5)... 259 129 5,745 -- 5,874
Tax benefit from stock issued................................ -- -- 4,746 -- 4,746
Shares cancelled upon reacquisition by Company............... (75) (37) (1,631) -- (1,668)
Unearned compensation-restricted stock (Note 5).............. -- -- (1,072) -- (1,072)
Cash dividends-common stock ($0.12 per share)................ -- -- -- (11,163) (11,163)
----------- ------- ---------- -------- ----------
BALANCE AT FEBRUARY 29, 1996................................... 97,380 $48,690 $ 90,432 $924,799 $1,063,921
----------- ------- ---------- -------- ----------
----------- ------- ---------- -------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Circuit City
Stores, Inc. and its subsidiaries (the Company), all of which are wholly owned.
All significant intercompany balances and transactions have been eliminated in
consolidation.
(B) CASH AND CASH EQUIVALENTS
Cash equivalents of $10,113,000 and $18,719,000 at February 29, 1996, and
February 28, 1995, respectively, consist of highly liquid debt securities with
original maturities of three months or less.
(C) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, excluding
interest rate swap agreements ("swaps"), approximates fair value due to variable
interest rates on long-term debt and the short-term maturities of the assets and
other liabilities. Credit risk is the exposure created by the potential
nonperformance of another material party to an agreement due to changes in
economic, industry or geographic factors. The Company mitigates credit risk by
dealing only with counterparties that are highly rated by several financial
rating agencies. Accordingly, the Company does not anticipate loss for
nonperformance. The Company broadly diversifies all financial instruments along
industry, product and geographic areas. As discussed in Note 10, swaps are not
held for trading purposes and, therefore, are not carried at fair value.
(D) MERCHANDISE INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined by
the average cost method.
(E) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the assets' estimated useful lives, which range from
three to 25 years.
Property held under capital leases is stated at the lower of the present
value of the minimum lease payments at the inception of the lease or market
value and is amortized straight-line over the lease term or the estimated useful
life of the asset, whichever is shorter.
(F) PRE-OPENING EXPENSES
Expenses associated with the opening of new stores are deferred and
amortized ratably over the period from the date of the store opening to the end
of the fiscal year.
(G) INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for income tax purposes, measured by applying
currently enacted tax laws. The Company recognizes deferred tax assets if it is
more likely than not that a benefit will be realized.
(H) DEFERRED REVENUE
The Company sells its own extended warranty contracts and extended warranty
contracts on behalf of unrelated third parties. The contracts extend beyond the
normal manufacturer's warranty period, usually with terms of coverage (including
the manufacturer's warranty period) between 12 and 60 months.
All revenue from the sale of the Company's own extended warranty contracts
is deferred and amortized on a straight-line basis over the life of the
contracts. Incremental direct contract costs related to the sale of contracts
are deferred and 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.
F-26
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
(I) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating profits generated by the Company's credit card bank subsidiary
are recorded as a reduction to selling, general and administrative expenses.
(J) ADVERTISING EXPENSES
All advertising costs are expensed as incurred.
(K) EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock and common stock equivalents outstanding during the year.
(L) RISKS AND UNCERTAINTIES
The Company is the nation's largest retailer of brand-name consumer
electronics and major appliances and a leading retailer of personal computers
and music software. The diversity of the Company's products, customers,
suppliers and geographic operations significantly reduces the risk that a severe
impact will occur in the near term as a result of changes in its customer base,
competition, sources of supply or markets. It is unlikely that any one event
would have a severe impact on the Company's operating results.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(M) RECLASSIFICATIONS
Certain amounts in prior years have been reclassified to conform to
classifications adopted in fiscal 1996.
2. PROPERTY AND EQUIPMENT
Property and equipment, at cost, at February 29 or 28 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Land and buildings (20 to 25 years)....................................... $ 89,089 $ 83,109
Construction in progress.................................................. 197,980 122,446
Furniture, fixtures and equipment (3 to 8 years).......................... 389,845 344,923
Leasehold improvements (10 to 15 years)................................... 353,157 286,610
Capital leases, primarily buildings (20 years)............................ 13,140 13,679
---------- ----------
1,043,211 850,767
Less accumulated depreciation and amortization............................ 268,946 257,811
---------- ----------
Property and equipment, net............................................... $ 774,265 $ 592,956
---------- ----------
---------- ----------
</TABLE>
F-27
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. DEBT
Long-term debt at February 29 or 28 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Term loans.................................................................... $275,000 $100,000
Short-term debt expected to be refinanced..................................... 100,000 53,000
Industrial Development Revenue Bonds due through 2006 at various prime-based
rates of interest ranging from 5.4% to 6.7%................................. 12,393 14,698
Obligations under capital leases (Note 7)..................................... 13,204 13,285
-------- --------
Total long-term debt.......................................................... 400,597 180,983
Less current installments..................................................... 1,436 2,378
-------- --------
Long-term debt, excluding current installments................................ $399,161 $178,605
-------- --------
-------- --------
</TABLE>
In July 1994, the Company entered into a seven-year, $100,000,000,
unsecured bank term loan. Principal is due in full at maturity with interest
payable periodically at LIBOR plus 0.50 percent. At February 29, 1996, the
interest rate on the term loan was 5.88 percent.
In May 1995, the Company entered into a five-year, $175,000,000, unsecured
bank term loan. Principal is due in full at maturity with interest payable
periodically at LIBOR plus 0.35 percent. At February 29, 1996, the interest rate
on the term loan was 5.65 percent.
The Company has the intent and ability to refinance the $100,000,000 of
short-term committed and uncommitted bank borrowings on a long-term basis by
entering into a multi-year term loan with a group of banks. Consequently, the
Company has classified the short-term debt as long-term for financial reporting
purposes. The existing revolving credit agreement could be used for this
purpose, although the Company does not currently intend to do so.
The Company maintains a multi-year, $100,000,000, unsecured revolving
credit agreement with four banks. The agreement calls for interest based on
certain money market rates and a commitment fee of 0.13 percent per annum. The
agreement was entered into as of June 30, 1992, was amended and restated as of
June 30, 1995, and terminates June 30, 2000. The agreement provides for annual
one-year extensions of the final maturity beginning on or before June 30, 1996,
and each June 30 thereafter. No amounts were outstanding under the revolving
credit agreement at February 29, 1996, or February 28, 1995.
The Industrial Development Revenue Bonds are collateralized by land,
buildings and equipment with an aggregate carrying value of approximately
$13,073,000 at February 29, 1996, and $15,400,000 at February 28, 1995.
The scheduled aggregate annual principal payments on long-term obligations
for the next five years are as follows: 1997 -- $1,436,000; 1998 -- $1,489,000;
1999 -- $1,586,000; 2000 -- $1,743,000; 2001 -- $176,380,000.
Under certain of the debt agreements, the Company must meet financial
covenants relating to minimum tangible net worth, current ratios and
debt-to-capital ratios. The Company was in compliance with all such covenants at
February 29, 1996, and February 28, 1995.
Short-term debt includes committed lines of credit and informal credit
arrangements. Amounts outstanding and committed lines of credit available are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Average short-term debt outstanding.............................. $185,789 $134,022 $ 77,392
-------- -------- --------
-------- -------- --------
Maximum short-term debt outstanding.............................. $479,000 $465,000 $355,000
-------- -------- --------
-------- -------- --------
Aggregate committed lines of credit.............................. $255,000 $285,000 $145,000
-------- -------- --------
-------- -------- --------
</TABLE>
The weighted average interest rate on the outstanding short-term debt was
5.9 percent during fiscal 1996, 5.3 percent during fiscal 1995 and 3.3 percent
during fiscal 1994.
F-28
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. DEBT -- Continued
The Company capitalizes interest in connection with the construction of
certain facilities. In fiscal 1996, interest capitalized amounted to $6,780,000
($3,846,000 and $2,626,000 in fiscal 1995 and 1994, respectively).
4. INCOME TAXES
The Company files a consolidated federal income tax return. The components
of the provision for income taxes on earnings before income taxes follow:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Current:
Federal.......................................................... $ 80,678 $ 21,250 $85,680
State............................................................ 4,536 5,730 8,720
-------- -------- -------
85,214 26,980 94,400
-------- -------- -------
Deferred:
Federal.......................................................... 18,891 69,035 (14,790)
State............................................................ 3,520 4,710 (3,010)
-------- -------- -------
22,411 73,745 (17,800)
-------- -------- -------
Provision for income taxes......................................... $107,625 $100,725 $76,600
-------- -------- -------
-------- -------- -------
</TABLE>
The enactment of the Omnibus Tax Reconciliation Act of 1993 on August 10,
1993, increased the federal statutory income tax rate for corporations from 34
percent to 35 percent effective January 1, 1993. This change in the federal tax
rate and the resulting revaluation of the Company's deferred tax asset had a
favorable impact on the fiscal 1994 provision for income taxes. The effective
income tax rate differed from the Federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate..................................... 35.0 % 35.0 % 35.0 %
State and local income taxes, net of Federal benefit.................. 2.5 2.5 1.8
Other, net............................................................ -- -- (0.1 )
------ ------ ------
Effective income tax rate............................................. 37.5 % 37.5 % 36.7 %
------ ------ ------
------ ------ ------
</TABLE>
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to a significant portion of the deferred tax assets and
liabilities at February 29, 1996, and February 28, 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Deferred Tax Assets:
Deferred revenue............................................................ $ 24,475 $ 32,049
Inventory capitalization.................................................... 3,784 6,482
Accrued expenses............................................................ 34,190 31,815
Other....................................................................... 3,182 5,114
-------- --------
Total gross deferred tax assets.......................................... 65,631 75,460
-------- --------
Deferred Tax Liabilities:
Depreciation and amortization............................................... 39,800 30,510
Prepaid benefit programs.................................................... 886 2,892
Other prepaid expenses...................................................... 9,376 5,347
Other....................................................................... 6,337 5,068
-------- --------
Total gross deferred tax liabilities..................................... 56,399 43,817
-------- --------
Net Deferred Tax Asset........................................................ $ 9,232 $ 31,643
-------- --------
-------- --------
</TABLE>
F-29
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. INCOME TAXES -- Continued
Of the gross deferred tax assets at February 29, 1996, and February 28,
1995, approximately $61 million and $66 million, respectively, can be realized
by carrybacks or offsetting of deferred tax liabilities. Based on the Company's
historical and current pre-tax earnings, management believes the remaining
amount will be realized through future taxable income; therefore, no valuation
allowance is necessary.
5. CAPITAL STOCK AND STOCK INCENTIVE PLANS
(A) PREFERRED STOCK
In conjunction with the Company's Shareholders Rights Plan, preferred stock
purchase rights were distributed as a dividend at the rate of one right for each
share of the Company's common stock. The rights are exercisable only upon the
attainment of, or the commencement of a tender offer to attain, a specified
ownership interest in the Company by a person or group. When exercisable, each
right would entitle shareholders to buy one four-hundredth of a newly issued
share of Cumulative Participating Preferred Stock, Series E, $20 par value, at
an exercise price of $140 per share. A total of 500,000 shares of such preferred
stock, which have preferential dividend and liquidation rights, have been
authorized; 300,000 shares have been reserved. No such shares are outstanding.
In the event that an acquiring person or group acquires the specified ownership
percentage of the Company's common stock (except pursuant to a cash tender offer
for all outstanding shares determined to be fair by continuing directors) or
engages in certain transactions with the Company after the rights become
exercisable, each right will be converted into a right to purchase, for half the
current market price at that time, shares of the Company's common stock valued
at two times the exercise price.
The Company also has 1,500,000 shares of undesignated Preferred Stock
authorized of which no shares are outstanding.
(B) RESTRICTED STOCK
The Company has issued restricted stock under the provisions of the 1994
and 1988 Stock Incentive Plans whereby key employees are granted restricted
shares of the Company's common stock. Shares are awarded in the name of the
employee, who has all the rights of a stockholder, subject to certain
restrictions or forfeitures. Restrictions on the awards generally expire three
years from the date of grant. In fiscal 1996, restricted stock awards for
258,775 shares were granted to eligible employees. The market value of these
shares has been recorded as unearned compensation and is a component of
stockholders' equity. Unearned compensation is expensed over the restriction
periods. In fiscal 1996, a total of $3,362,500 was charged to operations
($2,552,500 in 1995 and $2,955,400 in 1994). As of February 29, 1996, 499,279
restricted shares were outstanding.
(C) EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan for all employees meeting
certain eligibility criteria. Under the Plan, eligible employees may purchase
shares of the Company's common stock, subject to certain limitations, at 85
percent of its market value. Purchases are limited to 10 percent of an
employee's eligible compensation, up to a maximum of $7,500 per year. At
February 29, 1996, a total of 62,406 shares remained available under the Plan.
During fiscal 1996, 474,889 shares were issued to or purchased on the open
market for employees (537,467 and 436,400 in fiscal 1995 and 1994,
respectively). The average price per share was $29.97, $22.23 and $26.20 in
fiscal 1996, 1995 and 1994, respectively. The purchase price discount is charged
to operations and totaled $2,030,000, $1,760,200 and $1,653,700 in fiscal 1996,
1995 and 1994, respectively.
(D) STOCK INCENTIVE PLANS
Under the Company's stock incentive plans, incentive and non-qualified
stock options may be granted to management, key employees and outside directors
to purchase shares of the Company's common stock. The exercise price for
incentive stock options for employees and non-qualified options for outside
directors is the market value at the date of grant; for non-qualified options
granted under the 1988 Plan for employees, it is at least 85 percent of the
market value at the date of grant (100 percent under the 1994 Plan). Options are
generally exercisable over a period of from one to 10 years from the date of
grant.
F-30
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. CAPITAL STOCK AND STOCK INCENTIVE PLANS -- Continued
Changes in stock options outstanding (and option exercise prices for such
options) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of year ($5.94 to
$33.00)................................................... 3,709,271 3,593,745 3,494,626
Granted ($18.19 to $34.63).................................. 762,384 750,500 562,425
Exercised ($6.25 to $25.13)................................. (644,806) (260,234) (316,243)
Cancelled ($6.25 to $33.00)................................. (264,143) (374,740) (147,063)
---------- ---------- ----------
Options outstanding at end of year ($5.94 to $34.63)........ 3,562,706 3,709,271 3,593,745
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at end of year ($5.94 to $33.00)........ 1,847,169 2,070,319 1,662,032
---------- ---------- ----------
---------- ---------- ----------
Shares available for grant at end of year (options and
restricted stock)......................................... 2,147,207 2,759,698 1,010,488
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The stock incentive plans provide for the granting of stock appreciation
rights (SARs) in tandem with non-qualified stock option grants at the discretion
of the board of directors' compensation and personnel committee. The SARs
granted to date become fully exercisable only upon a change of control, as
defined, of the Company, notwithstanding other conditions of exercisability of
the options. The SARs permit the optionee to surrender an exercisable SAR for an
amount equal to the excess of the market price of the common stock over the
option price when the right is exercised. Market value is defined as the greater
of the highest closing price of the Company's stock during the 90 days preceding
the change of control or the closing price on the date preceding the exercises.
As of February 29, 1996, 5,895,967 non-qualified options with related SARs had
been granted with such terms (5,417,163 in 1995 and 4,888,333 in 1994).
6. PENSION PLAN
The Company has a non-contributory defined benefit pension plan covering
the majority of full-time employees who are at least age 21 and have completed
one year of service. The cost of this program is being funded currently. Plan
benefits are generally based on years of service and average compensation. Plan
assets consist primarily of equity securities and included 80,000 shares of the
Company's common stock at February 29, 1996, and February 28, 1995.
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR
28
----------------------------
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Service cost of benefits earned during the year........................ $ 5,896 $4,485 $ 3,916
Interest cost on projected benefit obligation.......................... 3,632 2,715 2,351
Actual return on plan assets........................................... (9,277) (102) (3,632)
Net amortization....................................................... 6,314 (3,452) 1,212
------- ------ -------
Net pension expense.................................................... $ 6,565 $3,646 $ 3,847
------- ------ -------
------- ------ -------
</TABLE>
F-31
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. PENSION PLAN -- Continued
Contributions of $1,160,000, $3,710,000 and $4,503,000 were required in
fiscal 1996, 1995 and 1994, respectively.
The following table sets forth the Plan's financial status and amounts
recognized in the consolidated balance sheets as of February 29 or 28:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Actuarial present value of benefit obligation:
Accumulated benefit obligation
Vested....................................................................... $ 39,505 $ 25,983
Non-vested................................................................... 5,136 3,720
-------- --------
Total benefits................................................................. 44,641 29,703
Additional amounts related to projected salary increases....................... 22,747 15,910
-------- --------
Projected benefit obligation for services rendered to date..................... 67,388 45,613
Plan assets at fair value...................................................... (47,093) (37,046)
-------- --------
Projected benefit obligation in excess of plan assets.......................... 20,295 8,567
Unrecognized loss from past experience......................................... (14,117) (8,102)
Unrecognized prior service cost................................................ 875 981
Unrecognized net obligation being recognized over 15 years..................... 1,212 1,414
-------- --------
Accrued pension cost........................................................... $ 8,265 $ 2,860
-------- --------
-------- --------
</TABLE>
Assumptions used in the accounting for the pension plan were:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR
28
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate.................................. 7.0% 8.0% 7.5%
Rate of increase in compensation levels......................... 6.0% 6.5% 6.0%
Rate of return on plan assets................................... 9.0% 8.0% 9.0%
---- ---- ----
</TABLE>
7. LEASE COMMITMENTS
The Company conducts a substantial portion of its business in leased
premises. The Company's lease obligations are based upon contractual minimum
rates. For certain locations, amounts in excess of these minimum rates are
payable based upon specified percentages of sales. Rental expense and sublease
income for all operating leases are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 29 OR 28
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Minimum rentals.................................................... $148,082 $118,042 $96,110
Rentals based on sales volume...................................... 2,871 2,513 1,910
Sublease income.................................................... (9,996) (8,875) (8,441)
-------- -------- -------
Net................................................................ $140,957 $111,680 $89,579
-------- -------- -------
-------- -------- -------
</TABLE>
The Company computes rent based on a percentage of sales volumes in excess
of defined amounts in certain store locations. Most of the Company's other
leases are fixed dollar rental commitments, many with rent escalations based on
the Consumer Price Index. Most provide that the Company pay taxes, maintenance,
insurance and certain other operating expenses applicable to the premises.
The initial term of real property leases will expire within the next 25
years; however, most of the leases have options providing for additional lease
terms of from five to 25 years at terms substantially the same as the initial
terms.
F-32
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. LEASE COMMITMENTS -- Continued
Future minimum fixed lease obligations, excluding taxes, insurance and
other costs payable directly by the Company, as of February 29, 1996, were:
<TABLE>
<CAPTION>
OPERATING OPERATING
CAPITAL LEASE SUBLEASE
FISCAL LEASES COMMITMENTS INCOME
- ---------------------------------------------------------------- ------- ----------- --------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
1997............................................................ $ 1,541 $ 163,577 $(10,618)
1998............................................................ 1,541 163,964 (9,316)
1999............................................................ 1,579 161,498 (7,759)
2000............................................................ 1,662 159,327 (6,980)
2001............................................................ 1,681 158,105 (5,987)
After 2001...................................................... 21,683 1,791,524 (35,165)
------- ----------- --------
Total minimum lease payments.................................... 29,687 $2,597,995 $(75,825)
----------- --------
----------- --------
Less amounts representing interest.............................. 16,483
-------
Present value of net minimum capital lease payments
(Note 3)...................................................... $13,204
-------
-------
</TABLE>
In fiscal 1996, the Company entered into sale-leaseback transactions with
unrelated parties at an aggregate selling price of $183,900,000 ($85,970,000 in
fiscal 1995 and $87,980,000 in fiscal 1994). The Company does not have
continuing involvement under the sale-leaseback transactions.
8. SUPPLEMENTARY INCOME STATEMENT INFORMATION
Advertising expense, which is included in selling, general and
administrative expenses in the accompanying consolidated statements of earnings,
amounted to $324,335,000, $262,969,000 and $211,022,000 (4.6 percent, 4.7
percent and 5.1 percent of net sales and operating revenues) in fiscal years
1996, 1995 and 1994, respectively.
9. SECURITIZATIONS
(A) CREDIT CARD SECURITIZATIONS
The Company uses securitization transactions, which allow for the sale of
credit card receivables to unrelated entities, to finance the consumer revolving
credit receivables generated by First North American National Bank, its wholly
owned credit card bank subsidiary (the "Bank Subsidiary"). No gain or loss has
been recorded on these sales. Proceeds from securitization transactions were
$692.3 million, $428.4 million and $214.6 million for fiscal 1996, 1995 and
1994, respectively. At February 29 or 28, the following amounts were
outstanding:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables................................................... $1,860,459 $1,181,954
Interest retained by Company.............................................. (110,459) (124,206)
---------- ----------
Net receivables transferred............................................... $1,750,000 $1,057,748
---------- ----------
---------- ----------
Net receivables transferred with recourse................................. $ 760,000 $1,057,748
---------- ----------
---------- ----------
Program capacity.......................................................... $1,910,000 $1,060,000
---------- ----------
---------- ----------
</TABLE>
The Bank Subsidiary finances its private-label credit card program through
a single master trust, through both private placement and the public market.
During fiscal 1996, the Bank Subsidiary placed an additional $300 million in the
public market for a total program capacity of $1,060 million. The master trust
vehicle permits further expansion of the securitization programs to meet future
receivables growth. The recourse provisions under the private-label
securitization programs were eliminated during fiscal 1996.
F-33
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. SECURITIZATIONS -- Continued
In addition, the Bank Subsidiary has an asset securitization program in
place for its bankcard receivables that allows the transfer of up to $850
million in receivables as of February 29, 1996. The bankcard securitization
agreements provide recourse to the Company for any cash flow deficiencies if the
monthly credit card cash flows from finance charges are inadequate to cover such
expenses. The Company believes that as of February 29, 1996, no liability
existed under these recourse provisions. The finance charges from the
transferred receivables are used to fund interest costs, charge-offs, servicing
fees and other related costs. The Bank Subsidiary's servicing revenue totaled
$142.9 million, $77.8 million and $54.5 million for fiscal 1996, 1995 and 1994,
respectively.
(B) AUTO LOAN SECURITIZATION
In fiscal 1996, the Company entered into a securitization transaction to
finance the consumer installment credit receivables generated by First North
American Credit Corporation, an installment lending division of the Company. No
gain or loss has been recorded on this sale. Proceeds from the auto loan
securitization transaction were $87 million during fiscal 1996. At February 29,
1996, the following amounts were outstanding:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
(AMOUNTS IN THOUSANDS)
Securitized receivables................................................................... $ 93,065
Interest retained by Company.............................................................. (6,065)
--------
Net receivables transferred with recourse................................................. $ 87,000
--------
--------
Program capacity.......................................................................... $100,000
--------
--------
</TABLE>
The finance charges from the transferred receivables are used to fund
interest costs, charge-offs and servicing fees. The securitization agreement
provides recourse to the Company for any cash flow deficiencies if the monthly
auto loan installment cash flows from finance charges are inadequate to cover
such expenses. The Company believes that as of February 29, 1996, no liability
existed under the recourse provision. As of April 1, 1996, the program capacity
increased to $125 million.
10. INTEREST RATE SWAPS
In October 1994, the Company entered into five-year swaps with notional
amounts totaling $300 million relating to the public issuance of securities by
the master trust. As part of this issuance, $344 million of five-year,
fixed-rate certificates were issued to fund consumer credit receivables. The
Bank Subsidiary is servicer for the accounts, and as such, receives its monthly
cash portfolio yield after deducting interest, charge-offs and other related
costs. The underlying receivables are based on a floating rate. The swaps were
put in place to better match funding costs to the receivables being securitized.
As a result, the master trust pays fixed-rate interest while the Company
utilizes the swaps to convert the fixed-rate obligation to a floating-rate,
LIBOR-based obligation. The fair value of the swaps is the amount at which they
could be settled based on estimates obtained from the counterparties, which are
two banks highly rated by several financial rating agencies. Recording the swaps
at fair value at February 29, 1996, and February 28, 1995, would result in gains
of $19.4 million and $6.3 million, respectively.
Concurrent with the funding of the $175 million term loan facility in May
1995, the Company entered into five-year swaps with notional amounts aggregating
$175 million. These swaps effectively converted the variable-rate obligation
into a fixed-rate obligation. The fair value of the swaps is the amount at which
they could be settled. This value is based on estimates obtained from the
counterparties, which are two banks highly rated by several financial rating
agencies. Recording the swaps at fair value at February 29, 1996, would result
in a loss of $2.5 million.
In November 1995, the Company entered into a 50-month amortizing swap in
the notional amount of $75 million relating to the auto loan receivable
securitization to convert variable-rate financing costs to a fixed-rate
obligation. The underlying receivables are issued with a fixed-rate finance
charge. The swap was put in place to better match the variable funding costs to
the receivables being securitized and to preserve net portfolio yield. Recording
the swap at fair value at February 29, 1996, would result in a loss of $0.3
million.
F-34
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. INTEREST RATE SWAPS -- Continued
The market and credit risks associated with these swaps are similar to
those relating to other types of financial instruments. Market risk is the
exposure created by potential fluctuations in interest rates and is directly
related to the product type, agreement terms and transaction volume. The Company
does not anticipate significant market risk from swaps, since their use is to
more closely match funding costs to the use of the funding. Credit risk is the
exposure created by potential nonperformance of another party to an agreement.
The Company mitigates credit risk by dealing with highly rated counterparties.
11. CONTINGENT LIABILITIES
In the normal course of business, the Company is involved in various legal
proceedings. Based upon the Company's evaluation of the information presently
available, management believes that the ultimate resolution of any such
proceedings will not have a material adverse effect on the Company's financial
position, liquidity or results of operations.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
---------------------- ---------------------- ---------------------- ---------------------- ----------
1996 1995 1996 1995 1996 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating
revenues.............. $1,391,658 $1,048,695 $1,600,805 $1,218,572 $1,783,446 $1,405,445 $2,253,214 $1,910,235 $7,029,123
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ $ 319,886 $ 263,677 $ 368,292 $ 309,617 $ 405,134 $ 336,049 $ 541,518 $ 475,657 $1,634,830
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings............ $ 24,618 $ 19,688 $ 41,246 $ 36,055 $ 31,451 $ 28,442 $ 82,060 $ 83,690 $ 179,375
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings per
share................. $ 0.25 $ 0.20 $ 0.42 $ 0.37 $ 0.32 $ 0.29 $ 0.83 $ 0.86 $ 1.82
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
1995
----------
<S> <C>
(AMOUNTS IN THOUSANDS EX
Net sales and operating
revenues.............. $5,582,947
----------
Gross profit............ $1,385,000
----------
Net earnings............ $ 167,875
----------
Net earnings per
share................. $ 1.72
----------
</TABLE>
F-35
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CIRCUIT CITY STORES, INC.:
We have audited the accompanying consolidated balance sheets of Circuit
City Stores, Inc. and subsidiaries as of February 29, 1996 and February 28, 1995
and the related consolidated statements of earnings, stockholders' equity and
cash flows for each of the fiscal years in the three-year period ended February
29, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Circuit City
Stores, Inc. and subsidiaries as of February 29, 1996 and February 28, 1995 and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended February 29, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
April 3, 1996
F-36
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales and operating revenues..................................... $1,863,947 $1,783,446 $5,246,256 $4,775,909
Cost of sales, buying and warehousing................................ 1,441,088 1,378,312 4,064,799 3,682,597
---------- ---------- ---------- ----------
Gross profit......................................................... 422,859 405,134 1,181,457 1,093,312
---------- ---------- ---------- ----------
Selling, general and administrative expenses......................... 381,804 346,264 1,051,190 921,072
Interest expense..................................................... 9,122 8,582 20,348 16,599
---------- ---------- ---------- ----------
Total expenses....................................................... 390,926 354,846 1,071,538 937,671
---------- ---------- ---------- ----------
Earnings before income taxes......................................... 31,933 50,288 109,919 155,641
Provision for income taxes........................................... 12,146 18,837 41,766 58,326
---------- ---------- ---------- ----------
Net earnings......................................................... $ 19,787 $ 31,451 $ 68,153 $ 97,315
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
and common share equivalents....................................... 99,489 98,750 99,335 98,549
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per share............................................... $ 0.20 $ 0.32 $ 0.69 $ 0.99
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends paid per common share...................................... $ 0.035 $ 0.030 $ 0.100 $ 0.085
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOV. 30, 1996 FEB. 29, 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................................... $ 41,310 $ 43,704
Net accounts and notes receivable.............................................................. 437,514 324,395
Merchandise inventory.......................................................................... 1,886,911 1,323,183
Deferred income taxes.......................................................................... 12,926 26,996
Prepaid expenses and other current assets...................................................... 36,112 17,399
------------- -------------
TOTAL CURRENT ASSETS........................................................................ 2,414,773 1,735,677
Property and equipment, net...................................................................... 900,305 774,265
Other assets..................................................................................... 18,452 16,080
------------- -------------
TOTAL ASSETS..................................................................................... $ 3,333,530 $ 2,526,022
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt......................................................... $ 1,466 $ 1,436
Accounts payable............................................................................... 904,398 604,488
Short-term debt................................................................................ 593,188 92,087
Accrued expenses and other current liabilities................................................. 75,296 123,789
Accrued income taxes........................................................................... 4,255 9,375
------------- -------------
TOTAL CURRENT LIABILITIES................................................................... 1,578,603 831,175
Long-term debt, excluding current installments................................................... 430,030 399,161
Deferred revenue and other liabilities........................................................... 174,043 214,001
Deferred income taxes............................................................................ 18,389 17,764
------------- -------------
TOTAL LIABILITIES........................................................................... 2,201,065 1,462,101
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.50 par value; 250,000,000 shares authorized;
97,960,000 shares issued and outstanding, November 30, 1996................................. 48,980 48,690
Capital in excess of par value................................................................. 100,303 90,432
Retained earnings.............................................................................. 983,182 924,799
------------- -------------
TOTAL STOCKHOLDERS' EQUITY.................................................................. 1,132,465 1,063,921
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................................... $ 3,333,530 $ 2,526,022
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net earnings $ 68,153 $ 97,315
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization.................................................................. 74,614 60,277
(Gain) loss on sales of property and equipment................................................. (1,117) 3,856
Provision for deferred income taxes............................................................ 14,695 5,211
Decrease in deferred revenue and other liabilities............................................. (39,958) (27,970)
Increase in net accounts and notes receivable.................................................. (113,119) (62,982)
Increase in merchandise inventory, prepaid expenses and other current assets................... (582,441) (936,021)
(Increase) decrease in other assets............................................................ (2,372) 1,176
Increase in accounts payable, accrued expenses and other current liabilities
and accrued income taxes..................................................................... 246,297 418,997
--------- ---------
Net cash used in operating activities............................................................. (335,248) (440,141)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment............................................................... (400,408) (397,000)
Proceeds from sales of property and equipment..................................................... 200,871 178,207
--------- ---------
Net cash used in investing activities............................................................. (199,537) (218,793)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt......................................................... 501,101 435,000
Proceeds from issuance of long-term debt.......................................................... 32,088 222,000
Principal payments on long-term debt.............................................................. (1,189) (2,158)
Proceeds from issuance of common stock, net....................................................... 10,161 11,335
Dividends paid.................................................................................... (9,770) (8,244)
--------- ---------
Net cash provided by financing activities......................................................... 532,391 657,933
--------- ---------
Decrease in cash and cash equivalents............................................................... (2,394) (1,001)
Cash and cash equivalents at beginning of year...................................................... 43,704 46,962
--------- ---------
Cash and cash equivalents at end of period.......................................................... $ 41,310 $ 45,961
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Circuit City Stores, Inc. and its
subsidiaries (the Company) conform to generally accepted accounting principles.
The interim period financial statements are unaudited; however, in the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim consolidated financial
statements have been included. The fiscal year-end balance sheet data was
derived from audited financial statements. The consolidated financial statements
included herein should be read in conjunction with the notes to consolidated
financial statements included in the Company's 1996 annual report to
stockholders.
2. DEBT
On June 14, 1996, the Company completed a five-year $130 million senior
unsecured term loan agreement with a group of banks. Principal is due in full at
maturity with interest payable periodically at LIBOR plus 0.35 percent.
On August 31, 1996, the Company entered into a multi-year, $150 million
unsecured revolving credit agreement with a group of banks. This facility
replaced a similar $100 million facility.
At November 30, 1996, $150 million was drawn on the unsecured revolving
bank credit facility and has been included in short-term debt.
3. INTEREST RATE SWAPS
The Company entered into a new 40-month amortizing swap relating to the
CarMax auto loan receivable securitization during the quarter with a notional
amount of approximately $63 million. Including this new swap, recording the
Company's interest rate swaps at fair value at November 30, 1996, would result
in a gain of approximately $13.0 million compared to a gain of $16.6 million at
February 29, 1996. The notional amount of the swaps was approximately $598
million at November 30, 1996, and $550 million at February 29, 1996.
F-40
<PAGE>
Back Cover: Description of photographs
(Top to bottom)
[PHOTO]
CarMax and Circuit City logos
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
(A redherring appears on the left-hand side of this page, rotated 90
degrees. Text follows.)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JANUARY 30, 1997
18,860,000 SHARES
CIRCUIT CITY STORES, INC. -- CARMAX GROUP
COMMON STOCK
OF
CIRCUIT CITY STORES, INC.
------------------------
OF THE 18,860,000 SHARES OF CARMAX STOCK BEING OFFERED, 3,772,000 SHARES ARE
BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 15,088,000 SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." THE NET PROCEEDS FROM THE OFFERING WILL BE ALLOCATED TO
THE CARMAX GROUP. PRIOR TO THE OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE CARMAX STOCK. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE PER SHARE WILL BE BETWEEN $15 AND $17. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
THE CARMAX STOCK IS COMMON STOCK OF THE COMPANY THAT IS INTENDED TO REFLECT
SEPARATELY THE PERFORMANCE OF THE USED- AND NEW-CAR RETAIL BUSINESS
CONSTITUTING THE CARMAX GROUP OF THE COMPANY. A SECOND SERIES OF COMMON STOCK
OF THE COMPANY, THE CIRCUIT CITY STOCK, IS INTENDED TO REFLECT SEPARATELY
THE PERFORMANCE OF THE CONSUMER ELECTRONICS AND APPLIANCE RETAIL BUSINESS
CONSTITUTING THE COMPANY'S CIRCUIT CITY GROUP, INCLUDING THE CIRCUIT CITY
GROUP'S INTEREST IN THE CARMAX GROUP. HOLDERS OF CARMAX STOCK AND
CIRCUIT CITY STOCK ARE ALL HOLDERS OF COMMON STOCK 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 CIRCUIT CITY STOCK IS NOT BEING OFFERED FOR SALE BY
THIS PROSPECTUS.
DIVIDENDS ON THE CARMAX STOCK WILL BE PAID AT THE DISCRETION OF THE BOARD OF
DIRECTORS OF THE COMPANY OUT OF THE LESSER OF (I) THE ASSETS OF THE COMPANY
LEGALLY AVAILABLE FOR THE PAYMENT OF DIVIDENDS AND (II) THE CARMAX GROUP
AVAILABLE DIVIDEND AMOUNT. THE COMPANY CURRENTLY DOES NOT INTEND TO PAY
DIVIDENDS ON THE CARMAX STOCK. THE VOTING POWER OF ONE SHARE OF CARMAX
STOCK RELATIVE TO ONE SHARE OF CIRCUIT CITY STOCK WILL FLUCTUATE BASED
UPON THE TIME-WEIGHTED RELATIVE MARKET VALUES THEREOF.
SUBJECT TO CERTAIN CONDITIONS, THE CARMAX STOCK MAY BE REDEEMED, AT THE
COMPANY'S OPTION, FOR SHARES OF ONE OR MORE WHOLLY-OWNED SUBSIDIARIES OF THE
COMPANY TO WHICH THE ASSETS AND LIABILITIES OF THE CARMAX GROUP HAVE BEEN
TRANSFERRED. IN THE EVENT OF A DISPOSITION BY THE COMPANY OF ALL OR
SUBSTANTIALLY ALL OF THE PROPERTIES AND ASSETS OF THE CARMAX GROUP, THE COMPANY
WILL, SUBJECT TO CERTAIN CONDITIONS AND LIMITATIONS, BE REQUIRED TO (I) PAY A
DIVIDEND ON OR REDEEM SHARES OF CARMAX STOCK IN AN AMOUNT EQUAL TO THE PRODUCT
OF THE OUTSTANDING CARMAX FRACTION, MULTIPLIED BY THE NET PROCEEDS OF SUCH
DISPOSITION OR (II) CONVERT EACH OUTSTANDING SHARE OF CARMAX STOCK INTO A NUMBER
OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 110% OF THE RATIO OF THE AVERAGE MARKET
VALUE OF ONE SHARE OF CARMAX STOCK TO THE AVERAGE MARKET VALUE OF ONE SHARE OF
CIRCUIT CITY STOCK. THE COMPANY MAY, AT ANY TIME, CONVERT EACH SHARE OF CARMAX
STOCK INTO A NUMBER OF SHARES OF CIRCUIT CITY STOCK EQUAL TO 115% OF THE RATIO
OF THE TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CARMAX STOCK TO THE
TIME-WEIGHTED AVERAGE MARKET VALUE OF ONE SHARE OF CIRCUIT CITY STOCK. IN THE
EVENT OF THE LIQUIDATION OF THE COMPANY, THE RIGHTS OF THE HOLDERS OF THE CARMAX
STOCK AND THE CIRCUIT CITY STOCK WILL BE FIXED ON A PER SHARE BASIS IN
PROPORTION TO THEIR RESPECTIVE LIQUIDATION UNITS, WITH EACH SHARE OF CARMAX
STOCK HAVING .5 OF A LIQUIDATION UNIT, AND EACH SHARE OF CIRCUIT CITY STOCK
HAVING ONE LIQUIDATION UNIT.
THE FEATURES OF THE CARMAX STOCK AND THE CIRCUIT CITY STOCK ARE MORE FULLY
DISCUSSED UNDER "SUMMARY -- THE CARMAX STOCK" AND "DESCRIPTION OF CAPITAL STOCK"
IN THIS PROSPECTUS. ------------------------
THE CARMAX STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "KMX,"
SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
PER SHARE........................................... $ $ $
TOTAL(3)............................................ $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT
$1,060,910.
(3) THE COMPANY HAS GRANTED TO THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF TO PURCHASE UP TO AN AGGREGATE OF
2,829,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS,
IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE
TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND
PROCEEDS TO COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES OF CARMAX STOCK ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND
IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SIMPSON THACHER & BARTLETT, COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT FEBRUARY , 1997
AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST
PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INTERNATIONAL
GOLDMAN SACHS INTERNATIONAL
WHEAT FIRST BUTCHER SINGER
, 1997
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
It is expected that the following expenses will be incurred in connection
with the issuance and distribution of the CarMax Stock:*
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee........................................... $ 90,910
NASD filing fee......................................................................... 30,500
NYSE listing fee........................................................................ 107,000
Blue Sky fees and expenses.............................................................. 7,500
Printing and engraving expenses......................................................... 225,000
Legal fees and expenses................................................................. 350,000
Accounting fees and expenses............................................................ 200,000
Miscellaneous........................................................................... 50,000
----------
Total............................................................................ $1,060,910
----------
----------
</TABLE>
- ---------------
* All of the expenses except the Securities and Exchange Commission filing fee,
the NASD filing fee and the NYSE listing fee represent estimates only.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The laws of the Commonwealth of Virginia pursuant to which the Company is
incorporated permit it to indemnify its officers and directors against certain
liabilities with the approval of its shareholders. The Articles of Incorporation
of the Company, which have been approved by its shareholders, provide for the
indemnification of each director and officer (including former directors and
officers and each person who may have served at the request of the Company as a
director or officer of any other legal entity and, in all such cases, his or her
heirs, executors and administrators) against liabilities (including expenses)
reasonably incurred by him or her in connection with any actual or threatened
action, suit or proceeding to which he or she may be made a party by reason of
his or her being or having been a director or officer of the Company, except in
relation to any action, suit or proceeding in which he or she has been adjudged
liable because of willful misconduct or a knowing violation of the criminal law.
The Company has purchased directors' and officers' liability insurance
policies. Within the limits of their coverage, the policies insure (1) the
directors and officers of the Company and its subsidiaries against certain
losses resulting from claims against them in their capacities as directors and
officers to the extent that such losses are not indemnified by the Company and
(2) the Company to the extent that it indemnifies such directors and officers
for losses as permitted under the laws of Virginia.
In the Underwriting Agreement, a proposed form of which is filed as Exhibit
1.1 hereto, the Underwriters will agree to indemnify, under certain conditions,
the Company, its directors, certain of its officers and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 16. EXHIBITS.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
***1.1 Form of Underwriting Agreement.
4.1 Registrant's Amended and Restated Articles of Incorporation, effective July 10, 1996, filed as Exhibit
3(i) to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996 (File No. 1-5767)
are expressly incorported herein by this reference.
***4.2 Form of Registrant's Articles of Amendment and Restatement, to be filed with the Virginia State
Corporation Commission prior to the completion of this Offering.
+4.3 (a) Form of Certificate of Circuit City Stores, Inc. -- CarMax Group Stock.
*4.3 (b) Form of Certificate of Circuit City Stores, Inc. -- Circuit City Group Stock.
4.4 Registrant's Bylaws, as Amended and Restated June 18, 1996, filed as Exhibit 3 (ii) to Registrant'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.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
4.5 Amended and Restated Rights Agreement dated March 5, 1996, between Registrant and Norwest Bank Minnesota,
N.A., as Rights Agent, filed as Exhibit 4(a) to Registrant's Current Report on Form 8-K dated March 5,
1996 (File No. 1-5767) is expressly incorporated herein by this reference.
***4.6 Form of Amended and Restated Rights Agreement between Registrant and Norwest Bank Minnesota, N.A., as
Rights Agent, as proposed to be amended and restated prior to the completion of the Offering.
**5.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the Circuit City Stores,
Inc. -- CarMax Group Stock and the CarMax Group rights to purchase Preferred Stock, Series F, being
registered.
*5.2 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the legality of the Circuit City
Stores, Inc. -- Circuit City Group Stock and the Circuit City Group rights to purchase Preferred Stock,
Series E, being registered.
**8.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax matters.
*23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consents of McGuire, Woods, Battle & Boothe, L.L.P. (included in Exhibits 5.1, 5.2 and 8.1).
**24 Powers of Attorney.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** Exhibit is filed herewith to replace identically numbered exhibit to
Amendment No. 1 to this Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on January 14, 1997.
+ Exhibit is filed herewith to replace Exhibit 4.3 to Amendment No. 1 to this
Registration Statement on Form S-3 as filed with the Securities and Exchange
Commission on January 14, 1997.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused
this amended registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Henrico,
Commonwealth of Virginia, on January 30, 1997.
CIRCUIT CITY STORES, INC.
By: /s/ MICHAEL T. CHALIFOUX
_____________________________
MICHAEL T. CHALIFOUX
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
respective capacities and on the dates indicated opposite their names.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ----------------------
<C> <S> <C>
/s/ RICHARD L. SHARP* President, Chief Executive Officer and January 30, 1997
- ------------------------------------------------------ Chairman of the Board (Principal
RICHARD L. SHARP Executive Officer)
/s/ ALAN L. WURTZEL* Vice Chairman of the Board and Director January 30, 1997
- ------------------------------------------------------
ALAN L. WURTZEL
/s/ MICHAEL T. CHALIFOUX Senior Vice President, Chief Financial January 30, 1997
- ------------------------------------------------------ Officer, Secretary and Director
MICHAEL T. CHALIFOUX (Principal Financial Officer)
/s/ RICHARD N. COOPER* Director January 30, 1997
- ------------------------------------------------------
RICHARD N. COOPER
/s/ BARBARA S. FEIGIN* Director January 30, 1997
- ------------------------------------------------------
BARBARA S. FEIGIN
/s/ THEODORE D. NIERENBERG* Director January 30, 1997
- ------------------------------------------------------
THEODORE D. NIERENBERG
/s/ HUGH G. ROBINSON* Director January 30, 1997
- ------------------------------------------------------
HUGH G. ROBINSON
/s/ WALTER J. SALMON* Director January 30, 1997
- ------------------------------------------------------
WALTER J. SALMON
/s/ MIKAEL SALOVAARA* Director January 30, 1997
- ------------------------------------------------------
MIKAEL SALOVAARA
/s/ JOHN W. SNOW* Director January 30, 1997
- ------------------------------------------------------
JOHN W. SNOW
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ----------------------
<C> <S> <C>
/s/ EDWARD VILLANUEVA* Director January 30, 1997
- ------------------------------------------------------
EDWARD VILLANUEVA
/s/ PHILIP J. DUNN* Principal Accounting Officer January 30, 1997
- ------------------------------------------------------
PHILIP J. DUNN
</TABLE>
*By: /s/ MICHAEL T. CHALIFOUX
________________________________________________
MICHAEL T. CHALIFOUX
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
***1.1 Form of Underwriting Agreement.
4.1 Registrant's Amended and Restated Articles of Incorporation, effective July 10, 1996, filed as Exhibit
3(i) to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1996 (File No. 1-5767)
are expressly incorported herein by this reference.
***4.2 Form of Registrant's Articles of Amendment and Restatement, to be filed with the Virginia State
Corporation Commission prior to the completion of this Offering.
+4.3 (a) Form of Certificate of Circuit City Stores, Inc. -- CarMax Group Stock.
*4.3 (b) Form of Certificate of Circuit City Stores, Inc. -- Circuit City Group Stock.
4.4 Registrant's Bylaws, as Amended and Restated June 18, 1996, filed as Exhibit 3 (ii) to Registrant'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.
4.5 Amended and Restated Rights Agreement dated March 5, 1996, between Registrant and Norwest Bank Minnesota,
N.A., as Rights Agent, filed as Exhibit 4(a) to Registrant's Current Report on Form 8-K dated March 5,
1996 (File No. 1-5767) is expressly incorporated herein by this reference.
***4.6 Form of Amended and Restated Rights Agreement between Registrant and Norwest Bank Minnesota, N.A., as
Rights Agent, as proposed to be amended and restated prior to the completion of the Offering.
**5.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the Circuit City Stores,
Inc. -- CarMax Group Stock and the CarMax Group rights to purchase Preferred Stock, Series F, being
registered.
*5.2 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P., regarding the legality of the Circuit City
Stores, Inc. -- Circuit City Group Stock and the Circuit City Group rights to purchase Preferred Stock,
Series E, being registered.
**8.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax matters.
*23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consents of McGuire, Woods, Battle & Boothe, L.L.P. (included in Exhibits 5.1, 5.2 and 8.1).
**24 Powers of Attorney.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
*** Exhibit is filed herewith to replace identically numbered exhibit to
Amendment No. 1 to this Registration Statement on Form S-3 as filed with the
Securities and Exchange Commission on January 14, 1997.
+ Exhibit is filed herewith to replace Exhibit 4.3 to Amendment No. 1 to this
Registration Statement on Form S-3 as filed with the Securities and Exchange
Commission on January 14, 1997.
18,860,000 Shares
CIRCUIT CITY STORES, INC.
CIRCUIT CITY STORES, INC.-CARMAX GROUP COMMON STOCK
(par value $.50 per share)
UNDERWRITING AGREEMENT
February __, 1997
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Wheat, First Securities, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
Wheat, First Securities, Inc.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Circuit City Stores, Inc., a Virginia corporation (the
"Company"), proposes to issue and sell to the several Underwriters (as defined
below) 18,860,000 shares of its Circuit City Stores, Inc.-CarMax Group Common
Stock, par value $.50 per share (the "Firm Shares").
It is understood that, subject to the conditions hereinafter
stated, 15,088,000 Firm Shares (the "U.S. Firm Shares") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S. Underwriters")
in connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and 3,772,000 Firm Shares (the "International Shares") will be
sold to the several International Underwriters named in Schedule II hereto (the
"International Underwriters") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated and
Goldman, Sachs & Co. and Wheat, First Securities, Inc. shall act as
representatives (the "U.S. Representatives") of the several U.S. Underwriters,
and Morgan Stanley International & Co. and Goldman, Sachs & Co. shall act as
representatives (the "International Representatives") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the Underwriters.
<PAGE>
2
The Company also proposes to issue and sell to the several
U.S. Underwriters not more than an additional 2,829,000 shares of its Circuit
City Stores, Inc.-CarMax Group Common Stock, par value $.50 per share (the
"Additional Shares"), if and to the extent that the U.S. Representatives shall
have determined to exercise, on behalf of the U.S. Underwriters, the right to
purchase such shares of common stock granted to the U.S. Underwriters in Section
2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares". The shares of Circuit City Stores, Inc.-CarMax
Group Common Stock, par value $.50 per share, of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the "CarMax Stock".
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement relating to the Shares.
The registration statement contains the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and Canada
to United States and Canadian Persons. An international prospectus is to be used
in connection with the offering and sale of Shares outside the United States and
Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front and back cover pages. The registration statement as amended at the
time it becomes effective, including the information (if any) deemed to be part
of the registration statement at the time of effectiveness pursuant to Rule 430A
under the Securities Act of 1933, as amended (the "Securities Act"), and all
documents incorporated therein by reference, is hereinafter referred to as the
"Registration Statement"; the U.S. prospectus and the international prospectus
in the respective forms first used to confirm sales of Shares, including all
documents incorporated therein by reference, are hereinafter collectively
referred to as the "Prospectus". If the Company has filed an abbreviated
registration statement to register additional shares of CarMax Stock pursuant to
Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement"),
then any reference herein to the term "Registration Statement" shall be deemed
to include such Rule 462 Registration Statement.
1. Representations and Warranties. The Company
represents and warrants to and agrees with each of the Underwriters, U.S. and
International that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the knowledge of the Company, threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such
part became effective, did not contain and as amended or supplemented,
if applicable, will not contain any untrue
<PAGE>
3
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except
that the representations and warranties set forth in this paragraph 1(b)
do not apply to statements or omissions in the Registration Statement or
the Prospectus based upon information furnished to the Company in
writing by any Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect either on the Company and its
subsidiaries, taken as a whole, or the CarMax Group (as defined in the
Prospectus).
(d) Each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as currently
conducted and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect either on the Company and its
subsidiaries, taken as a whole, or the CarMax Group; all of the issued
shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable
and, except as shown on Schedule III hereto, are owned, directly or
indirectly, by the Company, free and clear of all liens, encumbrances,
equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
<PAGE>
4
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of common stock of the Company outstanding
prior to the issuance of the Shares have been duly authorized and are
validly issued, fully paid and non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the Amended and
Restated Articles of Incorporation or by-laws of the Company or any
agreement or other instrument binding upon the Company or any of its
subsidiaries that is material to either the Company and its
subsidiaries, taken as a whole, or the CarMax Group, or any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Company or any of its subsidiaries, and no
consent, approval, authorization or order of or qualification with any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as have
been obtained and such as may be required by the securities or Blue Sky
laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of either the Company and its subsidiaries, taken as a whole,
or the CarMax Group, from that set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement).
(k) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened to which the Company or any
of its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
<PAGE>
5
(l) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(m) The Company is not, and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(n) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect either on the Company and its subsidiaries,
taken as a whole, or the CarMax Group.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect either on the Company and its
subsidiaries, taken as a whole, or the CarMax Group.
(p) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(q) None of the Company's securities are accorded a rating by
any "nationally recognized statistical rating organization," as such
term is defined for purposes of Rule 436(g)(2) under the Securities Act.
<PAGE>
6
(r) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
2. Agreements to Sell and Purchase. The Company hereby agrees
to sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite their names at U.S. $________ a share ("Purchase Price").
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to sell to the U.S. Underwriters the Additional Shares, and the U.S.
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to 2,829,000 Additional Shares at the Purchase Price. If the U.S.
Representatives, on behalf of the U.S. Underwriters, elect to exercise such
option, the U.S. Representatives shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the U.S. Underwriters and the
date on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not during the period ending 180 days after the date of the Prospectus (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of CarMax Stock or any securities (other than shares of Circuit City Stores,
Inc. -- Circuit City Group Common Stock) convertible into or exercisable or
exchangeable for shares of CarMax Stock or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the
<PAGE>
7
CarMax Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of the CarMax Stock or such other securities, in
cash or otherwise; provided, that the Company (a) may issue shares and grant
stock options and similar rights under its employee benefit plans existing on
the date hereof, (b) may grant stock options and similar rights to directors of
the Company under benefit plans now existing or hereafter adopted (provided,
that options and similar rights granted under benefit plans hereafter adopted
shall not become exercisable prior to 180 days after the date of the Prospectus)
and (c) may sell the Shares as contemplated hereby during such 180 day period.
3. Terms of Public Offering. The Company is advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company is
further advised by you that the Shares are to be offered to the public initially
at U.S.$________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of
U.S.$________ a share under the public offering price, and that any Underwriter
may allow, and such dealers may reallow, a concession, not in excess of
U.S.$_______ a share, to any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 A.M., New York City time, on February __, 1997, or
at such other time on the same or such other date, not later than February __,
1997, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Closing Date."
Payment for any Additional Shares shall be made to the Company
in Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than ___________, 1997, as shall be designated in
writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall
be in such form and registered in such names and in such denominations as you
shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
<PAGE>
8
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The
obligations of the Company to sell the Shares to the Underwriters and the
several obligations of the Underwriters to purchase and pay for the Shares on
the Closing Date are subject to the condition that the Registration Statement
shall have become effective not later than 5:00 p.m. (New York City time) on the
date hereof.
The several obligations of the Underwriters hereunder are
subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date there shall not have occurred any change,
or any development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations, of
(x) the Company and its subsidiaries, taken as a whole, or (y) the
CarMax Group, from that set forth in the Prospectus, that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect that the representations and warranties of
the Company contained in this Agreement are true and correct as of the
Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely
upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date
an opinion of McGuire Woods Battle & Boothe LLP, outside counsel for the
Company, dated the Closing Date, to the effect that
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in
each
<PAGE>
9
jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be
in good standing would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole, or the
CarMax Group;
(ii) each significant subsidiary (as defined in
Rule 1-02 of Regulation S-X) of the Company (each, a
"Significant Subsidiary") has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to
conduct its business as currently conducted and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be
in good standing would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole, or the
CarMax Group;
(iii) the authorized capital stock of the
Company conforms as to legal matters to the description
thereof contained in the Prospectus;
(iv) the shares of common stock of the Company
outstanding prior to the issuance of the Shares have been duly
authorized and are validly issued, fully paid and
non-assessable;
(v) all of the issued shares of capital stock of each
Significant Subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and
non-assessable and, except as shown on Scheduled III hereto,
are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(vi) the Shares have been duly authorized and,
when issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the execution and delivery by the Company
of, and the performance by the Company of its obligations
under, this Agreement will not contravene any provision of
applicable law or the Amended and Restated Articles
<PAGE>
10
of Incorporation or by-laws of the Company or, to the best of
such counsel's knowledge, any agreement or other instrument
binding upon the Company or any of its Significant
Subsidiaries that is material either to the Company and its
subsidiaries, taken as a whole, or the CarMax Group, or, to
the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Company or any of its Significant Sub-
sidiaries, and no consent, approval, authorization or order of
or qualification with any governmental body or agency is
required for the performance by the Company of its obligations
under this Agreement, except such as have been obtained and
such as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of
the Shares by the U.S. Underwriters;
(ix) the statements (A) in the Prospectus under
the captions "Certain United States Tax Consequences,"
"Description of Capital Stock" and, to the extent such
statements describe the terms of this Agreement,
"Underwriters" and (B) in the Registration Statement in Item
15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings
and fairly summarize the matters referred to therein;
(x) after due inquiry, such counsel does not
know of any legal or governmental proceedings pending or
threatened to which the Company or any of its Significant
Subsidiaries is a party or to which any of the properties of
the Company or any of its Significant Subsidiaries is subject
that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(xi) the Company is not, and, after giving
effect to the offering and sale of the Shares and the
application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended;
(xii) such counsel (A) is of the opinion that
the Registration Statement and Prospectus (except for
financial statements and other financial and
<PAGE>
11
statistical data included therein as to which such counsel
need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder, (B) has no
reason to believe that (except for financial statements and
other financial and statistical data as to which such counsel
need not express any belief) each part of the Registration
Statement and the prospectus included therein at the time such
part became effective contained any untrue statement of a
material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading and (C) has no reason to believe that (except
for financial statements and other financial and statistical
data as to which such counsel need not express any belief) the
Prospectus contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to
matters of fact, on certificates of officers of the Company and of
public officials and may state that they express no opinion as to the
laws of any jurisdiction other than the Commonwealth of Virginia and the
federal law of the United States. The Underwriters acknowledge and
counsel may so note in their opinion that such counsel has represented
the Company and its subsidiaries only since July 1981.
(d) The Underwriters shall have received on the Closing Date
an opinion of Simpson Thacher & Bartlett, counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in
subparagraphs (vi) (but only as to the due authorization, valid
issuance, full payment for and non-assessability of, the Shares), (vii),
(ix) (but only as to the statements in the Prospectus under "Description
of Capital Stock" and "Underwriters"), and (xii) of paragraph (c) above.
With respect to subparagraph (xii) of paragraph (c) above,
McGuire Woods Battle & Boothe, L.L.P. and Simpson Thacher & Bartlett may
state that their opinion and belief are based upon their participation
in the preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification
except as specified.
The opinion of McGuire Woods Battle & Boothe, L.L.P. described
in paragraph (c) above shall be rendered to the Underwriters at the
request of the Company and shall so state therein.
<PAGE>
12
(e) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from KPMG Peat Marwick LLP independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus,
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(f) "Lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the officers and employees of the
Company and its subsidiaries identified on Schedule IV hereto relating
to sales and certain other dispositions of shares of CarMax Stock or
certain other securities, delivered to you on or before the date hereof,
shall be in full force and effect on the Closing Date.
(g) The several obligations of the U.S. Underwriters to
purchase Additional Shares hereunder are subject to the delivery to the
U.S. Representatives on the Option Closing Date of such documents as
they may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Additional Shares and
other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, five signed copies of
the Registration Statement (including exhibits thereto) and for delivery
to each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 5:00 P.M. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in paragraph (c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file with
the Commission within the applicable period specified in Rule 424(b)
under the Securities Act any prospectus required to be filed pursuant to
such Rule.
<PAGE>
13
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters or
counsel for the Company, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare, file
with the Commission and furnish, at its own expense, to the Underwriters
and to the dealers (whose names and addresses you will furnish to the
Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus
as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request, provided that the Company shall not be required to
qualify as a foreign corporation or file a general consent to service of
process in any jurisdiction.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve-month period ending February 28, 1998 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) To pay all document production charges and expenses of
Simpson Thacher & Bartlett, special counsel for the Underwriters (but
not including their fees for professional services), in connection with
the preparation of this Agreement.
(g) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements
and expenses of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Shares under the
Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including
<PAGE>
14
all printing costs associated therewith, and the mailing and delivering
of copies thereof to the Underwriters and dealers, in the quantities
hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the cost of printing or
producing any Blue Sky or Legal Investment memorandum in connection with
the offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer
and sale under state securities laws as provided in Section 6(d) hereof,
including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and
in connection with the Blue Sky or Legal Investment memorandum, (iv) all
filing fees and disbursements of counsel to the Underwriters incurred in
connection with the review and qualification of the offering of the
Shares by the National Association of Securities Dealers, Inc., (v) all
fees and expenses in connection with the preparation and filing of a
registration statement on Form 8-A or any amendment thereto relating to
the Common Stock and all costs and expenses incident to listing the
Shares on the NYSE, (vi) the cost of printing certificates representing
the Shares, (vii) the costs and charges of any transfer agent, registrar
or depositary, (viii) the costs and expenses of the Company relating to
investor presentations on any "road show" undertaken in connection with
the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides
and graphics, fees and expenses of any consultants engaged by the
Company or with the Company's prior approval in connection with the road
show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and
any such consultants, and the cost of any aircraft chartered with the
prior approval of the Company in connection with the road show and (ix)
all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not
otherwise made in this Section. It is understood, however, that except
as provided in this Section, Section 7 entitled "Indemnity and
Contribution," and the last paragraph of Section 9 below, the
Underwriters will pay all of their costs and expenses, including fees
and disbursements of their counsel, stock transfer taxes payable on
resale of any of the Shares by them and any advertising expenses
connected with any offers they may make.
7. Indemnity and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other
<PAGE>
15
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information furnished to the Company in
writing by any Underwriter through you expressly for use therein; provided, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
Person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the Company
to such Underwriter, but only with reference to information furnished to the
Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to paragraph (a) or (b) of this Section 7, such
person (the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the
<PAGE>
16
indemnified party shall have mutually agreed to the retention of such counsel or
(ii) the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any single firm serving as local counsel) for all
such indemnified parties and that all such fees and expenses shall be reimbursed
as they are incurred. In the case of any such separate firm for the Underwriters
and such control persons of the Underwriters, such firm shall be designated in
writing by Morgan Stanley & Co. Incorporated. In the case of any such separate
firm for the Company, and such directors, officers and control persons of the
Company, such firm shall be designated in writing by the Company. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as contemplated
by the second and third sentences of this paragraph, the indemnifying party
agrees that it shall be liable for any settlement made in good faith of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of
written notice from the indemnified party of such indemnifying party's failure
to reimburse the indemnified party as required by this Agreement and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with this Agreement prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in
paragraph (a) or (b) of this Section 7 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as
<PAGE>
17
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and of the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand in connection with the offering of the
Shares shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Shares (before deducting expenses) received by
the Company and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of the
Prospectus, bear to the aggregate Public Offering Price of the Shares. The
relative fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Underwriters' respective obligations to contribute pursuant to this Section
7 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not
be just or equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) of this Section 7. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 7 are
not exclusive and shall not limit any rights
<PAGE>
18
or remedies which may otherwise be available to any indemnified party at law or
in equity.
(f) The indemnity and contribution provisions contained in
this Section 7 and the representations and warranties of the Company contained
in this Agreement shall remain operative and in full force and effect regardless
of (i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter or by or on
behalf of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
8. Termination. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event singly or
together with any other such event makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. Effectiveness, Defaulting Underwriters. This Agreement
shall become effective upon execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it has or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase
<PAGE>
19
pursuant to this Agreement be increased pursuant to this Section 9 by an amount
in excess of one-ninth of such number of Shares without the written consent of
such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you and
the Company for the purchase of such Firm Shares are not made within 36 hours
after such default, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter or the Company. In any such case either you or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase the Additional Shares that such non-defaulting Underwriters would have
been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason (other than as a result of the termination of this Agreement
solely pursuant to the preceding paragraph or paragraph 8 hereof) the Company
shall be unable to perform its obligations under this Agreement, the Company
will reimburse the Underwriters or such Underwriters as have so terminated this
Agreement with respect to themselves, severally, for all out-of-pocket expenses
(including the fees and disbursements of their counsel) reasonably incurred by
such Underwriters in connection with this Agreement or the offering contemplated
hereunder.
10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
12. Notices. All communication hereunder will be in writing,
and, if sent to any Underwriter, will be sent to it by
<PAGE>
20
registered mail, overnight courier or facsimile, c/o Morgan Stanley & Co.
Incorporated, 1585 Broadway, New York, New York 10036 (facsimile no.:
(212)761-0370), Attention: Kirsten J. Feldman, and if sent to the Company, will
be sent to it by registered mail, overnight courier or facsimile at 9950
Maryland Drive, Richmond, Virginia 23222 (facsimile no.: (804)527-4173),
Attention: Michael T. Chalifoux.
<PAGE>
21
13. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
CIRCUIT CITY STORES, INC.
By_________________________________
Accepted, February __, 1997
MORGAN STANLEY & CO. INCORPORATED
GOLDMAN, SACHS & CO.
WHEAT, FIRST SECURITIES, INC.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By Morgan Stanley & Co. Incorporated
By______________________________________
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
WHEAT, FIRST SECURITIES, INC.
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By Morgan Stanley & Co. International Limited
By______________________________________
<PAGE>
Schedule I
U.S. Underwriters
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Wheat, First Securities, Inc.
[NAMES OF OTHER U.S. UNDERWRITERS]
--------------
Total U.S. Firm Shares........................ 15,088,000
==============
<PAGE>
Schedule II
International Underwriters
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
Morgan Stanley & Co. International Limited
Goldman, Sachs International
Wheat, First Securities, Inc.
[NAMES OF OTHER INTERNATIONAL
UNDERWRITERS]
---------------
Total International Firm Shares.................. 3,772,000
===============
<PAGE>
Schedule III
Issued Shares of Capital Stock
of the Company's Subsidiaries Not Owned
by the Company Free and Clear
Percentage owned
Entity by Circuit City Stores, Inc.
- ------ ----------------------------
CirCam Corporation (50%)
Comfort Technology, L.L.C. (60%)
Zoom Partners, L.P. (50%)
<PAGE>
Schedule IV
Officers and Employees to be Parties
to "Lock-Up" Agreements
Keith Browning
Thomas Folliard
William Ligon
Robert Mitchell
Mark O'Neil
Linvel Risner
Wylie Schwieder
Richard Smith
George Steinmetz
Dugald Yska
<PAGE>
Exhibit A
[Form of Lock-up Letter]
February __, 1997
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Wheat, First Securities, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
Wheat, First Securities, Inc.
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("Morgan Stanley") and Morgan Stanley & Co. International Limited
("MSIL") propose to enter into an Underwriting Agreement (the "Underwriting
Agreement") with Circuit City Stores, Inc., a Virginia corporation (the
"Company") providing for the public offering (the "Public Offering") by the
several Underwriters, including Morgan Stanley and MSIL (the "Underwriters") of
18,860,000 shares (the "Shares") of the Circuit City Stores, Inc.-CarMax Group
Common Stock, par value $.50 per share, of the Company (the "CarMax Stock").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, the undersigned will not, during the
period commencing on [date of the Prospectus] and ending 180 days after the date
of the final prospectus relating to the Public Offering (the "Prospectus"), (1)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of the CarMax Stock or any securities (other than shares of Circuit City
Stores, Inc. -- Circuit City Group Common Stock, par value $.50 per share, of
the Company) convertible into or exercisable or exchangeable for CarMax Stock
(whether such shares or any such securities are now owned by such person or are
hereafter acquired prior to or in connection with the Public Offering) or (2)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the CarMax Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of CarMax Stock or such other securities, in cash or
otherwise, except for any transfer or disposition of any such
<PAGE>
2
securities by sale or delivery to the Company or through bona fide gifts to
persons who agree in writing with you to be bound by this restriction. The
undersigned agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, the undersigned will not, during the period
commencing on the [date of the Prospectus] and ending 180 days after the date of
the Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of CarMax Stock or any security convertible into or
exercisable or exchangeable for CarMax Stock.
Whether or not the Public Offering actually occurs depends on
a number of factors, including market conditions. Any Public Offering will only
be made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
------------------------------
(Name)
------------------------------
(Address)
February ___, 1997
CIRCUIT CITY STORES, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
1. Name. The name of the Corporation is Circuit City Stores,
Inc.
2. The Amendments and Restatement. The Restatement restates the
Articles of Incorporation of the Corporation as set forth in the attachment
hereto. The Restatement contains the following amendments to the Articles of
Incorporation requiring shareholder approval: (i) the amendment and restatement
of Article V thereof as set forth in new Section A of Article V of the
Restatement and the addition to Article V thereof of a new Section C as set
forth in the Restatement ("Amendment No. 1"), (ii) the amendment and restatement
of Section A of Article III thereof as set forth in the Restatement ("Amendment
No. 2") and (iii) the amendment and restatement of certain provisions of Section
A of Article IV thereof as set forth in the Restatement and the deletion of
Article VII thereof in its entirety ("Amendment No. 3" and, collectively with
Amendment No. 1 and Amendment No. 2, the "Shareholder-Approved Amendments"). The
Restatement also includes the following amendments to the Articles of
Incorporation not requiring shareholder approval: (i) the deletion of Section B
of Article IV thereof, (ii) the amendment and restatement of Section C of
Article IV thereof as set forth in the Restatement, (iii) the addition to
Article IV thereof of a new Section D as set forth in the Restatement and (iv)
the addition to Article V thereof of a new Section B as set forth in the
Restatement (collectively the "Board-Approved Amendments").
3. Board Action. At a meeting held on December 9, 1996, the Board
of Directors adopted each of the Board-Approved Amendments and determined to
recommend to the shareholders of the Corporation each of the
Shareholder-Approved Amendments. Furthermore, at such meeting, the Board of
Directors authorized a restatement of the Articles of Incorporation containing
the Board-Approved Amendments and, subject to the shareholders' approval, the
Shareholder-Approved Amendments.
4. Shareholder Action.
(a) The Shareholder-Approved Amendments were submitted to the
shareholders in accordance with the Virginia Stock Corporation Act at a
meeting held on January 24, 1997.
(b) On the record date, the total number of shares of Common
Stock outstanding and entitled to vote on the Shareholder-Approved
Amendments was 97,953,294. No other class of stock of the Corporation
was outstanding or entitled to vote on the Shareholder-Approved
Amendments.
1
<PAGE>
(c) At the meeting of shareholders, the total number of votes
cast FOR and the total number of votes cast AGAINST the
Shareholder-Approved Amendments were as follows:
FOR AGAINST
------- -------
Amendment No. 1
Amendment No. 2
Amendment No. 3
The number of votes cast FOR each of the Shareholder-Approved
Amendments was sufficient for its approval.
5. Certificate Required by Law. These Articles of Amendment and
Restatement contain all of the information required by Section 13.1-711 of the
Code of Virginia and this paragraph constitutes the Certificate required by that
Section.
Dated: February ___, 1997 CIRCUIT CITY STORES, INC.
By: ________________________________
Senior Vice President,
Chief Financial Officer and
Secretary
2
<PAGE>
CIRCUIT CITY STORES, INC.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
ARTICLE I
NAME
The name of the Corporation is Circuit City Stores, Inc.
ARTICLE II
PURPOSES
The purpose for which the Corporation is organized is to engage in any
lawful business not required by the Virginia Stock Corporation Act to be stated
in the Articles of Incorporation.
The Corporation shall have all of the corporate powers of any character
which are not prohibited by law or required to be stated in the Articles of
Incorporation.
ARTICLE III
CAPITAL STOCK
A. Authorized Stock. The aggregate number of shares that the
Corporation shall have authority to issue and the par value per share are as
follows:
Class Number of Shares Par Value
----- ---------------- ---------
Preferred 2,000,000 $20.00
Common 350,000,000 $ .50
B. Preemptive Rights. No holder of outstanding shares of any class of
stock shall have any preemptive right with respect to (i) any shares of any
class of stock of the Corporation or other security that the Corporation may
determine to issue, whether the shares of stock or other security to be issued
is now or hereafter authorized, (ii) any warrants, rights or options to purchase
any such stock or other security, or (iii) any obligations convertible into any
such stock or other security or into warrants, rights or options to purchase any
such stock or other security.
ARTICLE IV
PREFERRED STOCK
A. General. Certain provisions relating to the Preferred Stock and
the relative rights of the Preferred Stock and the holders of the outstanding
shares thereof, regardless of series, are set forth below.
(1) Issuance in Series. The Board of Directors is authorized
to issue the Preferred Stock from time to time in one or more series and to
provide for the relative rights and preferences of each series by the adoption
of a resolution or resolutions fixing:
(a) The maximum number of shares in a series and the
designation of the series, which designation shall distinguish the
shares thereof from the shares of any other series or class;
(b) The rate of dividend, the time of payment, whether
dividends shall be cumulative and if so, the dates from which they
shall be cumulative, and the extent of participation rights, if any;
(c) Any right to vote with holders of shares of any other
series or class and any right to vote as a class, either generally or
as a condition to specified corporate action; provided, however, that
no holder of shares of Preferred Stock shall ever be entitled to more
than one vote for each share held by him;
(d) The price at and the terms and conditions on which shares
may be redeemed;
(e) The amount payable upon shares in the event of involuntary
liquidation;
(f) The amount payable upon shares in the event of voluntary
liquidation;
<PAGE>
(g) Sinking fund provisions for the redemption or purchase of
shares; and
(h) The terms and conditions on which shares may be converted,
if the shares of any series are issued with the privilege of
conversion; and
(i) Any other designations, rights, preferences or limitations
that are now or hereafter permitted by the laws of the Commonwealth of
Virginia and are not inconsistent with the provisions of paragraph
(A)(1) of this Article.
(2) Articles of Amendment. Before the issuance of any shares
of a series of the Preferred Stock (other than shares for which provision is
already made in these Amended and Restated Articles of Incorporation), Articles
of Amendment establishing such series shall be filed with and made effective by
the State Corporation Commission of Virginia, as required by law.
(3) Parity of All Shares. All shares of the Preferred Stock,
regardless of series, shall be identical with each other in all respects except
as is permitted in paragraph (A)(1) of this Article.
(4) Definitions. As used herein the following terms shall
have the following meanings:
(a) "Capital Stock" means any capital stock of any class or
series (however designated) of the Corporation.
(b) "Common Stock" means the Common Stock of the Corporation.
(c) "Dividends Accrued" means, with respect to the shares of
each series of the Preferred Stock an amount equal to the dividends
thereon at the annual dividend rate for such series computed from the
date of issue to the date to which reference is made, plus any
additional amounts provided by participation rights, whether or not
such amounts or any part thereof shall have been declared or set aside
to be paid and whether there shall be or have been any funds out of
which such amounts might legally be paid, less the amount of dividends
or participation rights declared and paid thereon.
(d) "Junior Stock" means any Capital Stock ranking, as to
dividends and as to rights in liquidation, dissolution or winding up of
the affairs of the Corporation, subordinate to the Preferred Stock.
(e) "Parity Stock" means any Capital Stock ranking, as to
dividends and as to rights in liquidation, dissolution or winding up of
the affairs of the Corporation, equally with the Preferred Stock.
(f) "Preferred Stock" means the Preferred Stock of the
Corporation.
(g) "Redemption" means any purchase or acquisition by the
Corporation, for a consideration, of shares of the Preferred Stock,
whether pursuant to an option of the Corporation or a sinking fund or
otherwise, if the holder of the Preferred Stock being acquired by the
Corporation is required to sell the shares the Corporation is acquiring
or if, as a result of any such purchase or acquisition, the Corporation
takes a credit against a sinking fund obligation.
(h) "Redemption Date" means the date fixed for the Redemption
of any shares of the Preferred Stock in a notice of Redemption given
pursuant to paragraph (A)(7) of this Article.
(i) "Redemption Price" means, with respect to the shares of
each series of the Preferred Stock, the price at which the Corporation
shall or may redeem such shares pursuant to the terms of the Articles
of Serial Designation for such series.
(j) "Subsidiary" means any corporation a majority of the
outstanding Voting Stock of which is owned, directly or indirectly, by
the Corporation or by the Corporation and one or more Subsidiaries.
(k) "Voting Stock" means stock of any class (however
designated) having voting power for the election of a majority of the
board of directors (or other governing body) of a corporation, other
than stock having such powers only by reason of the happening of a
contingency.
2
<PAGE>
(5) Dividends.
(a) The holders of outstanding shares of each series of the
Preferred Stock shall be entitled to receive, if, when and as declared
by the Board of Directors, out of funds legally available therefor,
cash dividends in accordance with the terms set forth in the amendment
to these Amended and Restated Articles of Incorporation establishing
such series.
(b) No dividends whatsoever shall be declared or paid upon, or
any sums set apart for the payment of dividends upon, any shares of
Preferred Stock or Parity Stock for any dividend period unless a like
proportionate dividend for the same dividend period (ratable in
proportion to the respective annual dividend rates) shall have been
declared and paid upon, or declared and a sufficient sum set apart for
the payment of such dividend upon, all outstanding shares of Preferred
Stock.
(c) Unless Dividends Accrued (to the extent that the amount
thereof shall have been determinable) on all outstanding shares of each
series of the Preferred Stock for all past dividend periods and the
then current period shall have been declared and paid, or declared and
a sum sufficient for the payment thereof set apart, and all mandatory
sinking fund payments required to be made pursuant to the terms of any
series of the Preferred Stock shall have been made in full, then (i) no
dividend whatsoever (other than a dividend payable solely in Junior
Stock) shall be declared or paid upon, or any sum set apart for the
payment of dividends upon, any shares of Junior Stock; (ii) no other
distribution shall be made upon any shares of Junior Stock; (iii) no
shares of Junior Stock shall be purchased, redeemed or otherwise
acquired for value by the Corporation or by any Subsidiary; and (iv) no
monies shall be paid into or set apart or made available for a sinking
or other like fund for the purchase, Redemption or other acquisition
for value of any shares of Junior Stock by the Corporation or any
Subsidiary.
(6) Voting Rights. No holder of outstanding shares of any
series of the Preferred Stock shall be entitled to vote for the election of
directors or upon any other matter, or to receive notice of or to participate in
any meeting of the stockholders of the Corporation, except (i) as hereinafter
provided or as provided in the amendment to these Amended and Restated Articles
of Incorporation establishing such series and (ii) as may be required by law.
(7) Redemption.
(a) Redemptions of outstanding shares of any series of the
Preferred Stock shall be made pursuant to the terms and conditions set
forth in these Amended and Restated Articles of Incorporation or in the
amendment thereto establishing such series and, unless they provide
otherwise, shall be made in the manner hereinbelow set forth.
(b) No less than thirty (30) nor more than sixty (60) days
prior to the Redemption Date notice of Redemption shall be given by
first class mail, postage prepaid, to the holders of record of the
outstanding shares of the Preferred Stock being redeemed at their last
known post office addresses shown in the Corporation's stock transfer
records. The notice of Redemption shall set forth the paragraph or
paragraphs of these Amended and Restated Articles of Incorporation (or
the amendment thereto establishing the series of which such shares are
a part) pursuant to which the shares are being redeemed, the number of
shares to be redeemed, the date fixed for Redemption, the Redemption
Price, and the place or places where certificates representing shares
to be redeemed may be surrendered. In case less than all of the
outstanding shares of a series are to be redeemed (i) the shares to be
redeemed shall be selected by lot or redeemed ratably or in such other
equitable manner as the Board of Directors may determine, and (ii) the
notice of Redemption shall set forth the numbers of the certificates
representing shares to be redeemed and, if less than all of the shares
represented by any such certificate are to be redeemed, the number of
shares to be redeemed which are represented by such certificate.
(c) If notice of Redemption of any outstanding shares of any
series of the Preferred Stock shall have been duly mailed as
hereinabove provided, then on or before the Redemption Date 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 in any bank or trust company in the City of Richmond,
3
<PAGE>
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, with irrevocable instructions and authority to
apply such amount 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 so made
shall, whether or not the certificates therefor shall have been
surrendered for cancellation, be no longer 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 the
Redemption Price, but without interest. Any interest accrued on such
funds shall be paid to the Corporation from time to time. Any fund so
deposited and unclaimed at the end of five years from the Redemption
Date 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.
(d) The Corporation shall also have the right to acquire
outstanding shares of any series of the Preferred Stock otherwise than
by Redemption, 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 such series shall not
have been declared and paid or declared and a sum sufficient for the
payment thereof set apart, neither the Corporation nor any Subsidiary
shall so acquire any shares of such series except in accordance with a
purchase offer made on the same terms to all the holders of the
outstanding shares of such series.
(e) Shares of any series of the Preferred Stock purchased,
redeemed or otherwise acquired by the Corporation shall constitute
authorized but unissued shares of Preferred Stock but undesignated as
to series, as provided by law, and, unless otherwise provided in these
Amended and Restated Articles of Incorporation or in the amendment
thereto establishing such series of the Preferred Stock, may be
reissued by the Corporation.
(8) Liquidation. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of shares of each series of the Preferred Stock then outstanding shall
be entitled to be paid in cash out of the net assets of the Corporation,
including its capital, an amount equal to the Redemption Price and no more,
before any distribution or payment shall be made to the holders of shares of
Junior Stock and, after payment to the holders of the outstanding shares of each
series of the Preferred Stock of the amounts to which they are respectively
entitled, the balance of such assets, if any, shall be paid to the holders of
Junior Stock according to their respective rights. For the purposes of the
preceding sentence, neither the consolidation of the Corporation with nor the
merger of the Corporation into any other corporation, nor the sale, lease or
other disposition of all or substantially all of the Corporation's properties
and assets shall, without further corporate action, be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation. If the net assets
of the Corporation are insufficient to pay the holders of the outstanding shares
of each series of the Preferred Stock the full amounts to which they are
respectively entitled, the entire net assets of the Corporation remaining shall
be distributed ratably to the holders of the outstanding shares of the Preferred
Stock in proportion to the full amounts to which they are respectively entitled.
(9) Conflicting Provisions. Subsequent to the date these
Amended and Restated Articles of Incorporation become effective the Corporation
may issue one or more series of Preferred Stock. In the event that any of the
foregoing provisions of these Amended and Restated Articles of Incorporation
conflict with the provisions of the amendment thereto establishing a series of
the Preferred Stock, then, as to such series, the specific provisions which
relate to it, and not the general provisions hereinabove set forth, shall
control.
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
4
<PAGE>
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 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.
5
<PAGE>
(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 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 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
6
<PAGE>
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 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
7
<PAGE>
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 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.
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 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
8
<PAGE>
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 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
9
<PAGE>
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 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 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
10
<PAGE>
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 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.
ARTICLE V
COMMON STOCK
A. General. Certain provisions relating to the Common Stock and the
relative rights of the Common Stock and the holders of the outstanding shares
thereof, regardless of series, are set forth below.
(1) Issuance in Series. The Board of Directors, by an adoption
of an amendment of these Amended and Restated Articles of Incorporation, may
fix, in whole or part, the preferences, limitations and relative rights, within
the limits set forth in applicable law, of one or more series of Common Stock of
the Corporation before the issuance of any shares of that series.
(2) Parity of All Shares. All shares of Common Stock,
regardless of series, shall be identical with each other in all respects except
as is permitted in paragraph (A)(1) of this Article.
B. Circuit City Stock and Carmax Stock.
(1) Designation of Series; Number of Shares of Each Series.
One series of Common Stock is hereby designated as "Circuit City Stores, Inc. --
Circuit City Group Common Stock" ("Circuit City Stock") consisting of
175,000,000 shares and a second series of Common Stock is hereby designated as
"Circuit City Stores, Inc. -- CarMax Group Common Stock" ("CarMax Stock")
consisting of 175,000,000 shares. The number of shares of each such series may
from time to time be increased (but not above the total number of authorized
shares of the class of Common Stock) or decreased (but not below the number of
shares of such series then outstanding) by the Board of Directors of the
Corporation.
11
<PAGE>
(2) Dividends Subject to any preferences, limitations and
relative rights of any outstanding series of the Preferred Stock and any
qualifications or restrictions on the Common Stock created thereby, dividends
may be declared and paid upon the Circuit City Stock and the CarMax Stock, upon
the terms with respect to each such series, and subject to the limitations
provided for below in this paragraph B(2) of this Article, as the Board of
Directors may determine.
(a) Dividends on Circuit City Stock. Dividends on Circuit City
Stock may be declared and paid only out of the lesser of (i) the assets
legally available therefor and (ii) the Circuit City Group Available
Dividend Amount.
(b) Dividends on Carmax Stock. Dividends on CarMax Stock may
be declared and paid only out of the lesser of (i) the assets legally
available therefor and (ii) the CarMax Group Available Dividend Amount.
(c) Discrimination in Dividends Between Series of Common
Stock. The Board of Directors, subject to the provisions of paragraphs
B(2)(a) and B(2)(b) of this Article, may at any time declare and pay
dividends exclusively on Circuit City Stock, exclusively on CarMax
Stock or on both such series, in equal or unequal amounts,
notwithstanding the relative amounts of the Circuit City Group
Available Dividend Amount and the CarMax Group Available Dividend
Amount, the amount of dividends previously declared on each series, the
respective voting or liquidation rights of each series or any other
factor.
(d) Share Distributions. Subject to paragraphs B(2)(a) and
B(2)(b) of this Article, as the case may be, and except as permitted by
paragraphs B(5)(a) and B(5)(b)(ii)(2) of this Article, the Board of
Directors may declare and pay dividends or distributions of shares of
the Common Stock (or Convertible Securities convertible into or
exchangeable or exercisable for shares of the Common Stock) on shares
of the Common Stock or shares of the Preferred Stock only as follows:
(i) dividends or distributions of shares of Circuit
City Stock (or Convertible Securities convertible into or
exchangeable or exercisable for shares of Circuit City Stock)
on shares of Circuit City Stock or shares of the Preferred
Stock attributed to the Circuit City Group;
(ii) dividends or distributions of shares of CarMax
Stock (or Convertible Securities convertible into or
exchangeable or exercisable for shares of CarMax Stock) on
shares of CarMax Stock or shares of the Preferred Stock
attributed to the CarMax Group; and
(iii) dividends or distributions of shares of CarMax
Stock (or Convertible Securities convertible into or
exchangeable or exercisable for shares of CarMax Stock) on
shares of Circuit City Stock or shares of the Preferred Stock
attributed to the Circuit City Group, but only if the sum of
(1) the number of shares of CarMax Stock to be so issued (or
the number of such shares which would be issuable upon
conversion, exchange or exercise of any Convertible Securities
to be so issued) and (2) the number of shares of CarMax Stock
which are issuable upon conversion, exchange or exercise of
any Convertible Securities then outstanding that are
attributed in accordance with this Article to the Circuit City
Group is less than or equal to the Number of Shares Issuable
with Respect to the Inter-Group Interest.
For purposes of this paragraph B(2)(d) of this Article, any
outstanding Convertible Securities that are convertible into or
exchangeable or exercisable for any other Convertible Securities which
are themselves convertible into or exchangeable or exercisable for
Circuit City Stock or CarMax Stock (or other Convertible Securities
that are so convertible, exchangeable or exercisable) shall be deemed
to have been converted, exchanged or exercised in full for such
Convertible Securities.
(3) Voting Rights. Except as otherwise provided by law or by the terms
of any outstanding series of Preferred Stock or any provision of these Amended
and Restated Articles of Incorporation restricting the power to vote on a
specified matter to other shareholders, the entire voting power of the
shareholders of the Corporation shall be vested in the holders of the Common
Stock, who shall be entitled to vote on any matter on which the holders of stock
12
<PAGE>
of the Corporation shall, by law or by the provisions of these Amended and
Restated Articles of Incorporation or Bylaws of the Corporation, be entitled to
vote, and both series of the Common Stock shall vote thereon together as a
single voting group. On each matter to be voted on by the holders of both series
of the Common Stock voting together as a single voting group, (i) each
outstanding share of Circuit City Stock shall have one vote and (ii) each
outstanding share of CarMax Stock shall have a number of votes (including a
fraction of one vote) equal to the number of votes determined by the ratio of
the weighted average during the 20 Trading Days ending on the tenth Trading Day
prior to the record date for determining the shareholders entitled to vote of
the Market Value of the CarMax Stock to the weighted average over the same 20
Trading Days of the Market Value of the Circuit City Stock, expressed as a
decimal fraction rounded to the nearest three decimal places, determined as
follows: (A) the numerator of such fraction shall be the sum of (1) four times
the average Market Value of the CarMax Stock over the period of five Trading
Days ending on such tenth Trading Day prior to such record date, (2) three times
the average Market Value of the CarMax Stock over the period of five Trading
Days ending on the 15th Trading Day prior to such record date, (3) two times the
average Market Value of the CarMax Stock over the period of five Trading Days
ending on the 20th Trading Day prior to such record date and (4) the average
Market Value of the CarMax Stock over the period of five Trading Days ending on
the 25th Trading Day prior to such record date and (B) the denominator of such
fraction shall be the sum of (1) four times the average Market Value of the
Circuit City Stock over the period of five Trading Days ending on such tenth
Trading Day prior to such record date, (2) three times the average Market Value
of the Circuit City Stock over the period of five Trading Days ending on the
15th Trading Day prior to such record date, (3) two times the average Market
Value of the Circuit City Stock over the period of five Trading Days ending on
the 20th Trading Day prior to such record date and (4) the average Market Value
of the Circuit City Stock over the period of five Trading Days ending on the
25th Trading Day prior to such record date.
Notwithstanding the foregoing provisions of this paragraph B(3) of this
Article, if shares of only one series of the Common Stock are outstanding on the
record date for determining the common shareholders entitled to vote on any
matter, then each share of that series shall be entitled to one vote and, if
either series of the Common Stock is entitled to vote as a separate voting group
with respect to any matter, each share of that series shall, for purpose of such
vote, be entitled to one vote on such matter.
In addition to any provision of law or any provision of these Amended
and Restated Articles of Incorporation entitling the holders of outstanding
shares of Circuit City Stock or CarMax Stock to vote as a separate voting group,
the Board of Directors may condition the approval of any matter submitted to
shareholders on receipt of a separate vote of the holders of outstanding shares
of Circuit City Stock or CarMax Stock.
(4) Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or termination of the Corporation, after payment or
provision for payment of the debts and other liabilities of the Corporation and
the full preferential amounts (including any accumulated and unpaid dividends)
to which the holders of any outstanding shares of the Preferred Stock are
entitled (regardless of the Group to which such shares of the Preferred Stock
were attributed), the holders of the Circuit City Stock and CarMax Stock shall
be entitled to receive the assets, if any, of the Corporation remaining for
distribution to holders of the Common Stock on a per share basis in proportion
to the respective liquidation units per share of such series. Each share of
Circuit City Stock shall have one liquidation unit and each share of CarMax
Stock shall have .5 of a liquidation unit. Neither a merger nor share exchange
of the Corporation into or with any other company, nor a merger or share
exchange of any other company into or with the Corporation, nor a sale, lease,
exchange or other disposition of all or any part of the assets of the
Corporation, shall, alone, be deemed a liquidation of the Corporation, or cause
the dissolution of the Corporation, for purposes of this paragraph (B)(4) of
this Article.
If the Corporation shall in any manner subdivide (by stock split,
reclassification or otherwise) or combine (by reverse stock split,
reclassification or otherwise) the outstanding shares of Circuit City Stock or
CarMax Stock, or declare a dividend or other distribution in shares of either
series to holders of such series, the per share liquidation units of either
series of the Common Stock specified in the preceding paragraph of this
paragraph B(4) of this Article, as adjusted from time to time, shall be
appropriately adjusted, as determined by the Board of Directors, so as to avoid
dilution in the aggregate, relative liquidation rights of the shares of any
series of the Common Stock.
13
<PAGE>
(5) Conversion or Redemption of the Common Stock. The Circuit City
Stock is subject to conversion or redemption and the CarMax Stock is subject to
conversion or redemption upon the terms provided below in this paragraph B(5) of
this Article; provided, however, that neither series of the Common Stock may be
converted or redeemed if the other series has been converted or redeemed in its
entirety or notice thereof shall have been given as required by this paragraph
B(5) of this Article.
(a) Mandatory and Optional Conversion and Redemption of Common
Stock Other than for Subsidiary Stock. (i) In the event of the
Disposition, in one transaction or a series of related transactions, by
the Corporation and/or its subsidiaries of all or substantially all of
the properties and assets attributed to either Group to one or more
persons or entities (other than (1) the Disposition by the Corporation
of all or substantially all its properties and assets in one
transaction or a series of related transactions in connection with the
liquidation, dissolution or termination of the Corporation and the
distribution of assets to shareholders as referred to in paragraph B(4)
of this Article, (2) the Disposition of the properties and assets of
either Group as contemplated by paragraph B(5)(b) of this Article or
otherwise to all holders of shares of such Group divided among such
holders on a pro rata basis in accordance with the number of shares of
stock issued in respect of such Group outstanding and, in the case of a
Disposition of the properties and assets attributed to the CarMax
Group, to the Corporation or subsidiaries thereof, divided among such
holders and the Corporation or subsidiaries thereof on a pro rata basis
in accordance with the number of shares of stock issued in respect of
such Group outstanding and the Number of Shares Issuable with Respect
to the Inter-Group Interest, (3) to any person or entity controlled (as
determined by the Board of Directors) by the Corporation or (4) in
connection with a Related Business Transaction), the Corporation shall,
on or prior to the 85th Trading Day after the date of consummation of
such Disposition (the "Disposition Date"), pay a dividend on the series
of the Common Stock relating to the Group subject to such Disposition
or redeem some or all of such Common Stock or convert such Common Stock
into Common Stock relating to the other Group (or another class or
series of common stock of the Corporation), all as provided by the
following paragraphs B(5)(a)(i)(1) and B(5)(a)(i)(2) of this Article
and, to the extent applicable, by paragraph B(5)(d) of this Article, as
the Board of Directors shall have selected among such alternatives:
(1) provided that there are assets legally available therefor:
(a) pay to the holders of the shares of the series of
the Common Stock relating to the Group subject to such
disposition a dividend, as the Board of Directors shall have
declared subject to compliance with paragraph B(2) of this
Article, in cash and/or in securities (other than a dividend
of the Common Stock) or other property having a Fair Value as
of the Disposition Date in the aggregate equal to (I) in the
case of a Disposition of the properties and assets attributed
to the Circuit City Group, the Fair Value of the Net Proceeds
of such Disposition and (II) in the case of a Disposition of
the properties and assets attributed to the CarMax Group, the
product of the Outstanding CarMax Fraction as of the record
date for determining holders entitled to receive such dividend
multiplied by the Fair Value of the Net Proceeds of such
Disposition; or
(b)(I) subject to the last sentence of this paragraph
B(5)(a)(i) of this Article, if such Disposition involves all
(not merely substantially all) of the properties and assets
attributed to such Group, redeem as of the Redemption Date
provided by paragraph B(5)(d)(iii), all outstanding shares of
the Common Stock relating to the Group subject to such
Disposition in exchange for cash and/or for securities (other
than the Common Stock) or other property having a Fair Value
as of the Disposition Date in the aggregate equal to (A) in
the case of a Disposition of the properties and assets
attributed to the Circuit City Group, the Fair Value of the
Net Proceeds of such Disposition and (B) in the case of a
Disposition of the properties and assets attributed to the
CarMax Group, the product of the Outstanding CarMax Fraction
as of such Redemption Date multiplied by the Fair Value of the
Net Proceeds of such Disposition; or
14
<PAGE>
(II) subject to the last sentence of this paragraph
B(5)(a)(i) of this Article, if such Disposition involves
substantially all (but not all) of the properties and assets
attributed to such Group, redeem as of the Redemption Date
provided by paragraph B(5)(d)(iv) of this Article such number
of whole shares of the series of the Common Stock relating to
the Group subject to such Disposition (which may be all of,
but not more than, such shares outstanding) as have in the
aggregate an average Market Value during the period of ten
consecutive Trading Days beginning on the 16th Trading Day
immediately succeeding the Disposition Date closest to (A) in
the case of a Disposition of the properties and assets
attributed to the Circuit City Group, the Fair Value as of the
Disposition Date of the Net Proceeds of such Disposition, in
consideration for cash and/or securities (other than the
Common Stock) or other property having a Fair Value in the
aggregate equal to such Fair Value of the Net Proceeds or (B)
in the case of a Disposition of the properties and assets
attributed to the CarMax Group, the product of the Outstanding
CarMax Fraction as of the date such shares are selected for
redemption multiplied by the Fair Value as of the Disposition
Date of the Net Proceeds of such Disposition in consideration
for cash and/or securities (other than the Common Stock) or
other property having a Fair Value in the aggregate equal to
such product; or
(2) declare that each outstanding share of the series of the
Common Stock relating to the Group subject to such Disposition shall be
converted as of the Conversion Date provided by paragraph B(5)(d)(v) of
this Article into a number of fully paid and nonassessable shares of
the series of the Common Stock relating to the other Group (or, if the
series of the Common Stock relating to the other Group is not Publicly
Traded at such time and shares of another class or series of the Common
Stock of the Corporation (other than the series of the Common Stock
relating to the Group subject to such Disposition) are then Publicly
Traded, of such other class or series of the common stock as has the
largest Market Capitalization as of the close of business on the
Trading Day immediately preceding the date of the notice of such
conversion required by paragraph B(5)(d)(v) of this Article), equal to
110% of the ratio, expressed as a decimal fraction rounded to the
nearest five decimal places, of the average Market Value of one share
of the Common Stock relating to the Group subject to such Disposition
over the period of 10 consecutive Trading Days beginning on the 16th
Trading Day following the Disposition Date to the average Market Value
of one share of the Common Stock relating to the other Group (or such
other class or series of common stock) over the same 10 Trading Day
period.
Notwithstanding the foregoing provisions of this paragraph B(5)(a)(i)
of this Article, the Corporation shall redeem shares of a series of the
Common Stock as provided by paragraphs B(5)(a)(i)(1)(b)(I) or (II) of
this Article only if the amount to be paid in redemption of such stock
is less than or equal to the Available Dividend Amount with respect to
the Group subject to such Disposition as of the Redemption Date.
(ii) For purposes of this paragraph B(5)(a) of this Article:
(1) as of any date, "substantially all of the
properties and assets" attributed to either Group shall mean a
portion of such properties and assets (x) that represents at
least 80% of the Fair Value of the properties and assets
attributed to such Group as of such date or (y) from which
were derived at least 80% of the aggregate revenues for the
immediately preceding twelve fiscal quarterly periods of the
Company (calculated on a pro forma basis to include revenues
derived from any of such properties and assets acquired during
such period) derived from the properties and assets of such
Group as of such date;
(2) in the case of a Disposition of the properties
and assets attributed to either Group in a series of related
transactions, such Disposition shall not be deemed to have
been consummated until the consummation of the last of such
transactions; and
(3) the Board of Directors may pay any dividend or
redemption price referred to in paragraph B(5)(a) (i) of this
Article in cash, securities (other than the Common Stock) or
other property, regardless of the form or nature of the
proceeds of the Disposition.
15
<PAGE>
(iii) After the payment of the dividend or the redemption
price with respect to the series of the Common Stock relating to the
Group subject to a Disposition as provided for by paragraph
B(5)(a)(i)(1) of this Article, the Board of Directors may declare that
each share of such series of the Common Stock remaining outstanding
shall be converted, but only as of a Conversion Date (determined as
provided by paragraph B(5)(d)(v) of this Article) prior to the first
anniversary of the payment of such dividend or redemption price, into a
number of fully paid and nonassessable shares of the series of the
Common Stock relating to the other Group (or, if the series of the
Common Stock relating to the other Group is not Publicly Traded at such
time and shares of any other class or series of common stock of the
Corporation (other than the series of the Common Stock relating to the
Group subject to such Disposition) are then Publicly Traded, of such
other class or series of common stock of the Corporation as has the
largest Market Capitalization as of the close of business on the
Trading Day immediately preceding the date of the notice of such
conversion required by paragraph B(5)(d)(v) of this Article) equal to
110% of (i) in the case of conversion of the Circuit City Stock, the
Market Value Ratio of the Circuit City Stock to the CarMax Stock or
(ii) in the case of conversion of the CarMax Stock, the Market Value
Ratio of the CarMax Stock to the Circuit City Stock, in each case, as
of the fifth Trading Day prior to the date of the notice of such
conversion required by paragraph B(5)(d)(v) of this Article.
(iv) The Board of Directors may at any time declare that each
outstanding share of either Circuit City Stock or CarMax Stock shall be
converted, as of the Conversion Date provided by paragraph B(5)(d)(v)
of this Article, into the number of fully paid and nonassessable shares
of CarMax Stock or Circuit City Stock, respectively (or, if such latter
series of Common Stock of the Corporation is not Publicly Traded at
such time and shares of any other class or series of common stock of
the Corporation (other than the series of the Common Stock subject to
such conversion) are then Publicly Traded, of such other class or
series of common stock of the Corporation as has the largest Market
Capitalization as of the close of business on the Trading Day
immediately preceding the date of the notice of conversion required by
paragraph B(5)(d)(v) of this Article) equal to 115% of (i) in the case
of conversion of the Circuit City Stock, the Market Value Ratio of the
Circuit City Stock to the CarMax Stock or (ii) in the case of
conversion of the CarMax Stock, the Market Value Ratio of the CarMax
Stock to the Circuit City Stock, in each case, as of the fifth Trading
Day prior to the date of the notice of such conversion required by
paragraph B(5)(d)(v) of this Article.
(b) Redemption of Common Stock for Subsidiary Stock. (i) At
any time at which all of the assets and liabilities attributed to the
CarMax Group (and no other assets or liabilities of the Corporation or
any subsidiary thereof) are held directly or indirectly by one or more
wholly-owned subsidiaries of the Corporation (each, a "CarMax Group
Subsidiary"), the Board of Directors may, provided that there are
assets legally available therefor, redeem all of the outstanding shares
of CarMax Stock, on a Redemption Date of which notice is delivered in
accordance with paragraph B(5)(d)(vi) of this Article, in exchange for
the number of shares of common stock of each CarMax Group Subsidiary
equal to the product of the Outstanding CarMax Fraction multiplied by
the number of shares of common stock of such CarMax Group Subsidiary to
be outstanding immediately following such exchange of shares, such
CarMax Group Subsidiary shares to be delivered to the holders of shares
of CarMax Stock on the Redemption Date either directly or indirectly
through another CarMax Group Subsidiary (as a wholly-owned subsidiary
thereof) and to be divided among the holders of CarMax Stock pro rata
in accordance with the number of shares of CarMax Stock held by each on
such Redemption Date, each of which shares of common stock of such
CarMax Group Subsidiary shall be, upon such delivery, fully paid and
nonassessable.
(ii) At any time at which all of the assets and liabilities
attributed to the Circuit City Group (and no other assets or
liabilities of the Corporation or any subsidiary thereof) are held
directly or indirectly by one or more wholly-owned subsidiaries of the
Corporation (each, a "Circuit City Group Subsidiary"), the Board of
Directors may, provided that there are assets legally available
therefor,
16
<PAGE>
(1) if the Number of Shares Issuable with Respect to
the Inter-Group Interest is zero, redeem all of the
outstanding shares of Circuit City Stock, on a Redemption Date
of which notice is delivered in accordance with paragraph
B(5)(d)(vi) of this Article, in exchange for all of the shares
of common stock of each Circuit City Group Subsidiary as will
be outstanding immediately following such exchange of shares,
such shares of common stock of each Circuit City Group
Subsidiary to be delivered to the holders of shares of Circuit
City Stock on the Redemption Date either directly or
indirectly through another Circuit City Group Subsidiary (as a
wholly-owned subsidiary thereof) and to be divided among the
holders of Circuit City Stock pro rata in accordance with the
number of shares of Circuit City Stock held by each on such
Redemption Date, each of which shares of common stock of such
Circuit City Group Subsidiary shall be, upon such delivery,
fully paid and nonassessable; or
(2) if the Number of Shares Issuable with Respect to
the Inter-Group Interest is greater than zero, either
(x) redeem all of the outstanding shares of
Circuit City Stock, on such a Redemption Date, in
exchange for (1) all of the shares of common stock of
each Circuit City Group Subsidiary as will be
outstanding immediately following such exchange of
shares and (2) a number of shares of CarMax Stock
equal to the Number of Shares Issuable with Respect
to the Inter-Group Interest, such shares of common
stock of each Circuit City Group Subsidiary to be
delivered to the holders of shares of Circuit City
Stock on the Redemption Date either directly or
indirectly through another Circuit City Group
Subsidiary (as a wholly-owned subsidiary thereof) and
the shares of common stock of each Circuit City Group
Subsidiary and the shares of CarMax Stock to be
divided among the holders of Circuit City Stock pro
rata in accordance with the number of shares of
Circuit City Stock held by each on such Redemption
Date, each of which shares of common stock of each
Circuit City Group Subsidiary and shares of CarMax
Stock shall be, upon such delivery, fully paid and
nonassessable; or
(y) (1) redeem all of the outstanding shares
of Circuit City Stock as contemplated by clause (x)
(1) above and (2) issue to one or more of the Circuit
City Group Subsidiaries a number of shares of CarMax
Stock equal to the Number of Shares Issuable with
Respect to the Inter-Group Interest.
(c) Treatment of Convertible Securities. After any Conversion
Date or Redemption Date on which all outstanding shares of either
series of the Common Stock are converted or redeemed, any share of such
series of the Common Stock that is to be issued on conversion, exchange
or exercise of any Convertible Securities shall, immediately upon such
conversion, exchange or exercise and without any notice from or to, or
any other action on the part of, the Corporation or its Board of
Directors or the holder of such Convertible Security:
(i) in the event the shares of such series of the
Common Stock outstanding on such Conversion Date were
converted into shares of the other series of the Common Stock
(or another class or series of common stock of the
Corporation) pursuant to paragraph B(5)(a)(i)(2) or paragraph
B(5)(a)(iii) or (iv) of this Article, be converted into the
amount of cash and/or the number of shares of the kind of
capital stock and/or other securities or property of the
Corporation that the number of shares of such series of the
Common Stock that were to be issued upon such conversion,
exchange or exercise would have received had such shares been
outstanding on such Conversion Date; or
(ii) in the event the shares of such series of the
Common Stock outstanding on such Redemption Date were redeemed
pursuant to paragraph B(5)(a)(i)(1)(b) or paragraph B(5)(b) of
this Article, be redeemed, to the extent of funds of the
Corporation legally available therefor, for $.01 per share in
cash for each share of such series of the Common Stock that
otherwise would be issued upon such conversion, exchange or
exercise.
17
<PAGE>
The provisions of the immediately preceding sentence shall not apply to
the extent that other adjustments in respect of such conversion,
exchange or redemption of a series of the Common Stock are otherwise
made pursuant to the provisions of such Convertible Securities.
(d) Notice and Other Provisions. (i) Not later than the tenth
Trading Day following the consummation of a Disposition referred to in
paragraph B(5)(a)(i) of this Article, the Corporation shall announce
publicly by press release (1) the Net Proceeds of such Disposition, (2)
the number of shares outstanding of the series of the Common Stock
relating to the Group subject to such Disposition, (3) the number of
shares of such series of Common Stock into or for which Convertible
Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof and (4) in the case of a
Disposition of the properties and assets attributable to the CarMax
Group, the Outstanding CarMax Fraction on the date of such notice. Not
earlier than the 26th Trading Day and not later than the 30th Trading
Day following the consummation of such Disposition, the Corporation
shall announce publicly by press release which of the actions specified
in paragraph B(5)(a)(i) of this Article, it has irrevocably determined
to take in respect of such Disposition.
(ii) If the Corporation determines to pay a dividend pursuant
to paragraph B(5)(a)(i)(1)(a) of this Article, the Corporation shall,
not later than the 30th Trading Day following the consummation of the
Disposition referred to in such paragraph, cause notice to be given to
each holder of shares of the series of the Common Stock relating to the
Group subject to such Disposition and to each holder of Convertible
Securities that are convertible into or exchangeable or exercisable for
shares of such series of Common Stock (unless alternate provision for
such notice to the holders of such Convertible Securities is made
pursuant to the terms of such Convertible Securities), setting forth
(1) the record date for determining holders entitled to receive such
dividend, which shall be not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such
Disposition, (2) the anticipated payment date of such dividend (which
shall not be more than 85 Trading Days following the consummation of
such Disposition), (3) the type of property to be paid as such dividend
in respect of the outstanding shares of such series of Common Stock,
(4) the Net Proceeds of such Disposition, (5) in the case of a
Disposition of the properties and assets attributable to the CarMax
Group, the Outstanding CarMax Fraction on the date of such notice, (6)
the number of outstanding shares of such series of Common Stock and the
number of shares of such series of Common Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable
or exercisable and the conversion, exchange or exercise price thereof
and (7) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities shall be entitled to receive such dividend only if such
holder properly converts, exchanges or exercises such Convertible
Securities on or prior to the record date referred to in clause (1) of
this sentence. Such notice shall be sent by first-class mail, postage
prepaid, to each such holder at such holder's address as the same
appears on the transfer books of the Corporation.
(iii) If the Corporation determines to undertake a redemption
pursuant to paragraph B(5)(a)(i)(1)(b)(I) of this Article, the
Corporation shall, not less than 35 Trading Days and not more than 45
Trading Days prior to the Redemption Date, cause notice to be given to
each holder of shares of the series of the Common Stock relating to the
Group subject to the Disposition referred to in such paragraph and to
each holder of Convertible Securities convertible into or exchangeable
or exercisable for shares of such series of Common Stock (unless
alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such Convertible
Securities), setting forth (1) a statement that all shares of such
series of Common Stock outstanding on the Redemption Date shall be
redeemed, (2) the Redemption Date (which shall not be more than 85
Trading Days following the consummation of such Disposition), (3) the
type of property in which the redemption price for the shares of such
series of Common Stock to be redeemed is to be paid, (4) the Net
Proceeds of such Disposition, (5) in the case of a Disposition of the
properties and assets attributed to the CarMax Group, the Outstanding
CarMax Fraction on the date of such notice, (6) the place or places
where certificates for shares of such series of Common Stock, properly
endorsed or assigned for transfer (unless the Corporation waives such
18
<PAGE>
requirement), are to be surrendered for delivery of cash and/or
securities or other property, (7) the number of outstanding shares of
such series of Common Stock and the number of shares of such series of
the Common Stock into or for which such outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, (8) in the case of
notice to be given to holders of Convertible Securities, a statement to
the effect that a holder of such Convertible Securities shall be
entitled to participate in such redemption only if such holder properly
converts, exchanges or exercises such Convertible Securities on or
prior to the Redemption Date referred to in clause (2) of this sentence
and a statement as to what, if anything, such holder will be entitled
to receive pursuant to the terms of such Convertible Securities or, if
applicable, this paragraph B(5) of this Article if such holder
thereafter converts, exchanges or exercises such Convertible Securities
and (9) a statement to the effect that, except as otherwise provided by
paragraph B(5)(d)(ix) of this Article, dividends on such shares of the
Common Stock shall cease to be paid as of such Redemption Date. Such
notice shall be sent by first-class mail, postage prepaid, to each such
holder at such holder's address as the same appears on the transfer
books of the Corporation.
(iv) If the Corporation determines to undertake a redemption
pursuant to paragraph B(5)(a)(i)(1)(b)(II) of this Article, the
Corporation shall, not later than the 30th Trading Day following the
consummation of the Disposition referred to in such paragraph, cause
notice to be given to each holder of shares of the series of the Common
Stock relating to the Group subject to such Disposition and to each
holder of Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such series of Common Stock
(unless alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of such
Convertible Securities) setting forth (1) a date not earlier than the
40th Trading Day and not later than the 50th Trading Day following the
consummation of the Disposition in respect of which such redemption is
to be made on which shares of such series of the Common Stock shall be
selected for redemption, (2) the anticipated Redemption Date (which
shall not be more than 85 Trading Days following the consummation of
such Disposition), (3) the type of property in which the redemption
price for the shares to be redeemed is to be paid, (4) the Net Proceeds
of such Disposition, (5) in the case of a Disposition of the properties
and assets attributed to the CarMax Group, the Outstanding CarMax
Fraction, (6) the number of shares of such series of Common Stock
outstanding and the number of shares of such series of Common Stock
into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange
or exercise price thereof, (7) in the case of notice to be given to
holders of Convertible Securities, a statement to the effect that a
holder of such Convertible Securities shall be eligible to participate
in such selection for redemption only if such holder properly converts,
exchanges or exercises such Convertible Securities on or prior to the
record date referred to in clause (1) of this sentence, and a statement
as to what, if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or, if applicable,
this paragraph B(5) of this Article if such holder thereafter converts,
exchanges or exercises such Convertible Securities and (8) a statement
that the Corporation will not be required to register a transfer of any
shares of such series of the Common Stock for a period of 15 Trading
Days next preceding the date referred to in clause (1) of this
sentence. Promptly following the date referred to in clause (1) of the
preceding sentence, but not earlier than 40 Trading Days nor later than
50 Trading Days following the consummation of such Disposition, the
Corporation shall cause a notice to be given to each holder of record
of shares of such series of Common Stock to be redeemed setting forth
(1) the number of shares of such series of Common Stock held by such
holder to be redeemed, (2) a statement that such shares of such series
of Common Stock shall be redeemed, (3) the Redemption Date, (4) the
kind and per share amount of cash and/or securities or other property
to be received by such holder with respect to each share of such series
of Common Stock to be redeemed, including details as to the calculation
thereof, (5) the place or places where certificates for shares of such
series of Common Stock, properly endorsed or assigned for transfer
(unless the Corporation shall waive such requirement), are to be
surrendered for delivery of such cash and/or securities or other
property, (6) if applicable, a statement to the effect that the shares
being redeemed may no longer be transferred on the transfer books of
the Corporation after the Redemption Date and (7) a statement to the
19
<PAGE>
effect that, subject to paragraph B(5)(d)(ix) of this Article,
dividends on such shares of such series of Common Stock shall cease to
be paid as of the Redemption Date. Such notices shall be sent by
first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Corporation.
(v) If the Corporation determines to convert either series of
the Common Stock into the other series (or another class or series of
common stock of the Corporation) pursuant to paragraph B(5)(a)(i)(2) or
paragraph B(5)(a)(iii) or (iv) of this Article, the Corporation shall,
not less than 35 Trading Days and not more than 45 Trading Days prior
to the Conversion Date, cause notice to be given to each holder of
shares of the series of the Common Stock to be so converted and to each
holder of Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such series of Common Stock
(unless alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of such
Convertible Securities) setting forth (1) a statement that all
outstanding shares of such series of Common Stock shall be converted,
(2) the Conversion Date (which, in the case of a conversion after a
Disposition, shall not be more than 85 Trading Days following the
consummation of such Disposition), (3) the per share number of shares
of Circuit City Stock or CarMax Stock or another class or series of
common stock of the Corporation, as the case may be, to be received
with respect to each share of such series of Common Stock, including
details as to the calculation thereof, (4) the place or places where
certificates for shares of such series of Common Stock, properly
endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered for delivery of certificates
for shares of such series of Common Stock, (5) the number of
outstanding shares of such series of Common Stock and the number of
shares of such series of Common Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, (6)
a statement to the effect that, subject to paragraph B(5)(d)(ix) of
this Article, dividends on such shares of CarMax Stock shall cease to
be paid as of such Conversion Date and (7) in the case of notice to
holders of such Convertible Securities, a statement to the effect that
a holder of such Convertible Securities shall be entitled to receive
shares of such series of Common Stock upon such conversion only if such
holder properly converts, exchanges or exercises such Convertible
Securities on or prior to such Conversion Date and a statement as to
what, if anything, such holder will be entitled to receive pursuant to
the terms of such Convertible Securities or, if applicable, this
paragraph B(5) of this Article if such holder thereafter converts,
exchanges or exercises such Convertible Securities. Such notice shall
be sent by first-class mail, postage prepaid, to each such holder at
such holder's address as the same appears on the transfer books of the
Corporation.
(vi) If the Corporation determines to redeem shares of either
series of the Common Stock pursuant to paragraph B(5)(b) of this
Article, the Corporation shall cause notice to be given to each holder
of shares of such series of the Common Stock to be redeemed and to each
holder of Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such series of the Common
Stock (unless alternate provision for such notice to the holders of
such Convertible Securities is made pursuant to the terms of such
Convertible Securities), setting forth (1) a statement that all shares
of such series of the Common Stock outstanding on the Redemption Date
shall be redeemed in exchange for shares of common stock of each
Circuit City Group Subsidiary (and, if such redemption is pursuant to
paragraph B(5)(b)(ii)(2)(x) of this Article, CarMax Stock) or common
stock of each CarMax Group Subsidiary, as the case may be, (2) the
Redemption Date, (3) in the case of a redemption of the CarMax Stock,
the Outstanding CarMax Fraction on the date of such notice, (4) the
place or places where certificates for shares of the series of the
Common Stock to be redeemed, properly endorsed or assigned for transfer
(unless the Corporation shall waive such requirement), are to be
surrendered for delivery of certificates for shares of the common stock
of each Circuit City Group Subsidiary (and, if such redemption is
pursuant to paragraph B(5)(b)(ii)(2)(x) of this Article, CarMax Stock)
or common stock of each CarMax Group Subsidiary, as the case may be,
(5) a statement to the effect that, subject to paragraph B(5)(d)(ix) of
this Article, dividends on such shares of the Common Stock shall cease
to be paid as of such Redemption Date, (6) the number of shares of such
series of the Common Stock outstanding and the number of shares of such
series of Common Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the
20
<PAGE>
conversion, exchange or exercise price thereof and (7) in the case of
notice to holders of Convertible Securities, a statement to the effect
that a holder of Convertible Securities shall be entitled to receive
shares of common stock of each Circuit City Group Subsidiary (and, if
such redemption is pursuant to paragraph B(5)(b)(ii)(2)(x) of this
Article, CarMax Stock) or common stock of each CarMax Group Subsidiary,
as the case may be, upon redemption only if such holder properly
converts, exchanges or exercises such Convertible Securities on or
prior to the Redemption Date and a statement as to what, if anything,
such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, this paragraph B(5) of this
Article, if such holder thereafter converts, exchanges or exercises
such Convertible Securities. Such notice shall be sent by first-class
mail, postage prepaid, not less than 30 Trading Days nor more than 45
Trading Days prior to the Redemption Date to each such holder at such
holder's address as the same appears on the transfer books of the
Corporation.
(vii) If less than all of the outstanding shares of the Common
Stock of a series are to be redeemed pursuant to paragraph
B(5)(a)(i)(1) of this Article, the shares to be redeemed by the
Corporation shall be selected from among the holders of shares of such
series of the Common Stock outstanding at the close of business on the
record date for such redemption on a pro rata basis among all such
holders or by lot or by such other method as may be determined by the
Board of Directors of the Corporation to be equitable.
(viii) The Corporation shall not be required to issue or
deliver fractional shares of any capital stock or of any other
securities to any holder of either series of the Common Stock upon any
conversion, redemption, dividend or other distribution pursuant to this
paragraph B(5) of this Article. If more than one share of either series
of the Common Stock shall be held at the same time by the same holder,
the Corporation may aggregate the number of shares of any capital stock
that shall be issuable or any other securities or property that shall
be distributable to such holder upon any conversion, redemption,
dividend or other distribution (including any fractional shares). If
there are fractional shares of any capital stock or of any other
securities remaining to be issued or distributed to the holders of
either series of the Common Stock, the Corporation shall, if such
fractional shares are not issued or distributed to the holder, pay cash
in respect of such fractional shares in an amount equal to the Fair
Value thereof on the fifth Trading Day prior to the date such payment
is to be made (without interest).
(ix) No adjustments in respect of dividends shall be made upon
the conversion or redemption of any shares of either series of the
Common Stock; provided, however, that if the Conversion Date or
Redemption Date, as the case may be, with respect to any shares of
either series of the Common Stock shall be subsequent to the record
date for the payment of a dividend or other distribution thereon or
with respect thereto, the holders of such series of the Common Stock at
the close of business on such record date shall be entitled to receive
the dividend or other distribution payable on or with respect to such
shares on the date set for payment of such dividend or other
distribution, in each case without interest, notwithstanding the
subsequent conversion or redemption of such shares.
(x) Before any holder of either series of the Common Stock
shall be entitled to receive any cash payment and/or certificates or
instruments representing shares of any capital stock and/or other
securities or property to be distributed to such holder with respect to
such series of the Common Stock pursuant to this paragraph B(5) of this
Article, such holder shall surrender at such place as the Corporation
shall specify certificates for such shares of the Common Stock,
properly endorsed or assigned for transfer (unless the Corporation
shall waive such requirement). The Corporation shall as soon as
practicable after receipt of certificates representing such shares of
the Common Stock deliver to the person for whose account such shares of
the Common Stock were so surrendered, or to such person's nominee or
nominees, the cash and/or the certificates or instruments representing
the number of whole shares of the kind of capital stock and/or other
securities or property to which such person shall be entitled as
aforesaid, together with any payment in respect of fractional shares
contemplated by paragraph B(5)(d)(viii) of this Article, in each case
without interest. If less than all of the shares of either series of
the Common Stock represented by any one certificate are to be redeemed,
the Corporation shall issue and deliver a new certificate for the
shares of such series of Common Stock not redeemed.
21
<PAGE>
(xi) From and after any applicable Conversion Date or
Redemption Date, as the case may be, all rights of a holder of shares
of either series of the Common Stock that were converted or redeemed
shall cease except for the right, upon surrender of the certificates
representing such shares of the Common Stock as required by paragraph
B(5)(d)(x) of this Article, to receive the cash and/or the certificates
or instruments representing shares of the kind and amount of capital
stock and/or other securities or property for which such shares were
converted or redeemed, together with any payment in respect of
fractional shares contemplated by paragraph B(5)(d)(viii) of this
Article and rights to dividends as provided in paragraph B(5)(d)(ix) of
this Article, in each case without interest. No holder of a certificate
that immediately prior to the applicable Conversion Date represented
shares of a series of the Common Stock shall be entitled to receive any
dividend or other distribution or interest payment with respect to
shares of any kind of capital stock or other security or instrument for
which such series of the Common Stock was converted until the surrender
as required by this paragraph B(5) of this Article of such certificate
in exchange for a certificate or certificates or instrument or
instruments representing such capital stock or other security. Subject
to applicable escheat and similar laws, upon such surrender, there
shall be paid to the holder the amount of any dividends or other
distributions (without interest) which theretofore became payable on
any class or series of capital stock of the Corporation as of a record
date after the Conversion Date, but that were not paid by reason of the
foregoing, with respect to the number of whole shares of the kind of
capital stock represented by the certificate or certificates issued
upon such surrender. From and after a Conversion Date, the Corporation
shall, however, be entitled to treat the certificates for a series of
the Common Stock that have not yet been surrendered for conversion as
evidencing the ownership of the number of whole shares of the kind or
kinds of capital stock of the Corporation for which the shares of such
series of the Common Stock represented by such certificates shall have
been converted, notwithstanding the failure to surrender such
certificates.
(xii) The Corporation shall pay any and all documentary, stamp
or similar issue or transfer taxes that may be payable in respect of
the issuance or delivery of any shares of capital stock and/or other
securities upon conversion or redemption of shares of either series of
the Common Stock pursuant to this paragraph B(5) of this Article. The
Corporation shall not, however, be required to pay any tax that may be
payable in respect of any transfer involved in the issuance or delivery
of any shares of capital stock and/or other securities in a name other
than that in which the shares of such series of the Common Stock so
converted or redeemed were registered, and no such issuance or delivery
shall be made unless and until the person requesting such issuance or
delivery has paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such tax has
been paid.
(xiii) Neither the failure to mail any notice required by this
paragraph B(5)(d) of this Article to any particular holder of the
Common Stock or of Convertible Securities nor any defect therein shall
affect the sufficiency thereof with respect to any other holder of
outstanding shares of the Common Stock or of Convertible Securities or
the validity of any such conversion or redemption.
(xiv) The Board of Directors may establish such rules and
requirements to facilitate the effectuation of the transactions
contemplated by this paragraph B(5) of this Article as the Board of
Directors shall determine to be appropriate.
(6) Application of the Provisions of this Certificate of Designations.
(a) Certain Determinations by the Board of Directors. The
Board of Directors shall make such determinations with respect to the
assets and liabilities to be attributed to the Groups, the application
of the provisions of this paragraph B of this Article to transactions
to be engaged in by the Corporation and the preferences, limitations
and relative rights of the holders of either series of the Common
Stock, and the qualifications and restrictions thereon, provided by
these Amended and Restated Articles of Incorporation as may be or
22
<PAGE>
become necessary or appropriate to the exercise of such preferences,
limitations and relative rights, including, without limiting the
foregoing, the determinations referred to in the following paragraphs
B(6)(a)(i), (ii), (iii), (iv) and (v) of this Article. A record of any
such determination shall be filed with the records of the actions of
the Board of Directors.
(i) Upon any acquisition by the Corporation or its
subsidiaries of any assets or business, or any assumption of
liabilities, outside of the ordinary course of business of the
Circuit City Group or the CarMax Group, as the case may be,
the Board of Directors shall determine whether such assets,
business and liabilities (or an interest therein) shall be for
the benefit of the Circuit City Group or the CarMax Group or
that an interest therein shall be partly for the benefit of
the Circuit City Group and partly for the benefit of the
CarMax Group and, accordingly, shall be attributed to the
Circuit City Group or the CarMax Group, or partly to each, in
accordance with paragraph B(7)(a) or (d) of this Article, as
the case may be.
(ii) Upon any issuance of any shares of CarMax Stock
at a time when the Number of Shares Issuable with Respect to
the Inter- Group Interest is greater than zero, the Board of
Directors shall determine, based on the use of the proceeds of
such issuance and any other relevant factors, whether all or
any part of the shares of CarMax Stock so issued shall reduce
the Number of Shares Issuable with Respect to the Inter-Group
Interest, and the Number of Shares Issuable with Respect to
the Inter-Group Interest shall be adjusted accordingly.
(iii) Upon any issuance by the Corporation or any
subsidiary thereof of any Convertible Securities that are
convertible into or exchangeable or exercisable for shares of
CarMax Stock, if at the time such Convertible Securities are
issued the Number of Shares Issuable with Respect to the
Inter-Group Interest is greater than zero, the Board of
Directors shall determine, based on the use of the proceeds of
such issuance of Convertible Securities in the business of the
Circuit City Group or the CarMax Group and any other relevant
factors, whether, upon conversion, exchange or exercise
thereof, the issuance of shares of CarMax Stock pursuant
thereto shall, in whole or in part, reduce the Number of
Shares Issuable with Respect to the Inter-Group Interest.
(iv) Upon any issuance of any shares of the Preferred
Stock of any series, the Board of Directors shall attribute,
based on the use of proceeds of such issuance of shares of the
Preferred Stock in the business of the Circuit City Group or
the CarMax Group and any other relevant factors, the shares so
issued entirely to the Circuit City Group or entirely to the
CarMax Group or partly to the Circuit City Group and partly to
the CarMax Group in such proportion as the Board of Directors
shall determine.
(v) Upon any redemption or repurchase by the
Corporation or any subsidiary thereof of shares of the
Preferred Stock of any class or series or of other securities
or debt obligations of the Corporation, the Board of Directors
shall determine, based on the property used to redeem or
purchase such shares, other securities or debt obligations,
which, if any, of such shares, other securities or debt
obligations redeemed or repurchased shall be attributed to the
Circuit City Group and which, if any, of such shares, other
securities or debt obligations shall be attributed to the
CarMax Group and, accordingly, how many of the shares of such
series of the Preferred Stock or of such other securities, or
how much of such debt obligations, that remain outstanding, if
any, are thereafter attributed to the Circuit City Group or to
the CarMax Group.
(b) Certain Determinations Not Required. Notwithstanding the
foregoing provisions of this paragraph B(6) of this Article, the
provisions of paragraphs B(7)(a), (c), (d) or (f) of this Article or
any other provision of this Article, at any time when there are not
outstanding both (i) one or more shares of Circuit City Stock or
Convertible Securities convertible into or exchangeable or exercisable
for Circuit City Stock and (ii) one or more shares of CarMax Stock or
Convertible Securities convertible into or exchangeable or exercisable
for CarMax Stock, the Corporation need not (A) attribute any of the
23
<PAGE>
assets or liabilities of the Corporation or any of its subsidiaries to
the Circuit City Group or the CarMax Group or (B) make any
determination required in connection therewith, nor shall the Board of
Directors be required to make any of the determinations otherwise
required by this Article, and in such circumstances the holders of the
shares of Circuit City Stock or CarMax Stock outstanding, as the case
may be, shall (unless otherwise specifically provided by these Amended
and Restated Articles of Incorporation) be entitled to all the
preferences or other relative rights of both series of the Common Stock
without differentiation between the Circuit City Stock and the CarMax
Stock.
(c) Board Determinations Binding. Subject to applicable law,
any determinations made in good faith by the Board of Directors of the
Corporation under any provision of this paragraph B(6) of this Article
or otherwise in furtherance of the application of this Article shall be
final and binding on all shareholders.
(7) Certain Definitions. As used in this Article, the following terms
shall have the following meanings (with terms defined in the singular having
comparable meaning when used in the plural and vice versa), unless the context
otherwise requires. As used in this paragraph B(7) of this Article, a
"contribution" or "transfer" of assets or properties from one Group to another
shall refer to the reattribution of such assets or properties from the
contributing or transferring Group to the other Group and correlative phrases
shall have correlative meanings.
(a) "Carmax Group" shall mean, as of any date:
(i) all businesses, assets and liabilities of each of
CarMax Auto Superstores, Inc., a Virginia corporation, CarMax,
Inc., a Virginia corporation, and C-Max Auto Superstores,
Inc., a California corporation (the "CarMax Group Companies"),
as of the date of the first issuance of CarMax Stock;
(ii) all assets and liabilities of the Corporation
and its subsidiaries attributed by the Board of Directors to
the CarMax Group, whether or not such assets or liabilities
are or were also assets and liabilities of any of the CarMax
Group Companies;
(iii) all properties and assets transferred to the
CarMax Group from the Circuit City Group (other than a
transaction pursuant to paragraph B(7)(a)(iv) of this Article)
pursuant to transactions in the ordinary course of business of
both the Circuit City Group and the CarMax Group or otherwise
as the Board of Directors may have directed as permitted by
this Article;
(iv) all properties and assets transferred to the
CarMax Group from the Circuit City Group in connection with an
increase in the Number of Shares Issuable with respect to the
Inter-Group Interest; and
(v) the interest of the Corporation or any of its
subsidiaries in any business or asset acquired and any
liabilities assumed by the Corporation or any of its
subsidiaries outside of the ordinary course of business and
attributed to the CarMax Group, as determined by the Board of
Directors as contemplated by paragraph B(6)(a)(i) of this
Article;
provided that (1) from and after the payment date of any dividend or
other distribution with respect to shares of CarMax Stock (other than a
dividend or other distribution payable in shares of CarMax Stock, with
respect to which adjustment shall be made as provided in paragraph
B(7)(s)(i) of this Article, or in securities of the Corporation
attributed to the CarMax Group, for which provision shall be made as
set forth in clause (2) of this proviso), the CarMax Group shall no
longer include an amount of assets or properties previously attributed
to the CarMax Group of the same kind as so paid in such dividend or
other distribution with respect of shares of CarMax Stock as have a
Fair Value on the record date for such dividend or distribution equal
to the product of (a) the Fair Value on such record date of the
aggregate of such dividend or distribution to holders of shares of
CarMax Stock declared multiplied by (b) a fraction the numerator of
which is equal to the Inter-Group Interest Fraction in effect on the
record date for such dividend or distribution and the denominator of
which is equal to the Outstanding CarMax Fraction in effect on the
record date for such dividend or distribution, (2) if the Corporation
24
<PAGE>
shall pay a dividend or make some other distribution with respect to
shares of CarMax Stock payable in securities of the Corporation that
are attributed to the CarMax Group for purposes of this Article (other
than CarMax Stock), there shall be excluded from the CarMax Group an
interest in the CarMax Group equivalent to the number or amount of such
securities that is equal to the product of the number or amount of
securities so distributed to holders of CarMax Stock multiplied by the
fraction specified in clause 1(b) of this proviso (determined as of the
record date for such distribution) (and such interest in the CarMax
Group shall be attributed to the Circuit City Group) and, to the extent
interest is or dividends are paid on the securities so distributed, the
CarMax Group shall no longer include a corresponding ratable amount of
the kind of assets paid as such interest or dividends as would have
been paid in respect of the securities equivalent to such interest in
the CarMax Group deemed held by the Circuit City Group if the
securities equivalent to such interest were outstanding (and in such
eventuality such assets as are no longer included in the CarMax Group
shall be attributed to the Circuit City Group) and (3) from and after
any transfer of any assets or properties from the CarMax Group to the
Circuit City Group, the CarMax Group shall no longer include such
assets or properties so contributed or transferred. The Corporation may
also, to the extent a dividend or distribution on the CarMax Stock has
been paid in Convertible Securities that are convertible into or
exchangeable or exercisable for CarMax Stock, cause such Convertible
Securities as are deemed to be held by the Circuit City Group in
accordance with the third to last sentence of paragraph B(7)(d) of this
Article and clause (2) of the proviso to the immediately preceding
sentence to be deemed to be converted, exchanged or exercised as
provided in the penultimate sentence of paragraph B(7)(d) of this
Article, in which case such Convertible Securities shall no longer be
deemed to be held by the Circuit City Group.
(b) "Carmax Group Available Dividend Amount", on any date,
shall mean the excess, if any, of
(i) the product of (x) the Outstanding CarMax
Fraction and (y) an amount equal to the total assets of the
CarMax Group less its total liabilities as of such date
determined in accordance with generally accepted accounting
principles as in effect at such time applied on a basis
consistent with that applied in determining the CarMax Group
Net Earnings (Loss), over
(ii) except to the extent that these Amended and
Restated Articles of Incorporation permit otherwise, the
amount that would be needed to satisfy the preferential rights
to which holders of any Preferred Stock attributed to the
CarMax Group are entitled upon dissolution of the Corporation;
provided, that such excess shall be reduced by an amount sufficient to
ensure that the CarMax Group would be able to pay its debts as they
become due in the usual course of business.
(c) "Carmax Group Net Earnings (Loss)", for any period through
any date, shall mean the net earnings or loss of the CarMax Group for
such period (or in respect of fiscal periods of the Corporation
commencing prior to the date of the first issuance of CarMax Stock, the
pro forma net earnings or loss of the CarMax Group for such period as
if such date had been the first day of such period) determined in
accordance with generally accepted accounting principles in effect at
such time, reflecting income and expense of the Corporation attributed
to the CarMax Group on a basis substantially consistent with
attributions of income and expense made in the calculation of the
Circuit City Group Net Earnings (Loss), including, without limitation,
corporate administrative costs, net interest and other financial costs
and income taxes.
(d) "Circuit City Group" shall mean, as of any date:
(i) the interest of the Corporation or any of its
subsidiaries on such date in all of the assets, liabilities
and businesses of the Corporation or any of its subsidiaries
(and any successor companies), other than any assets,
liabilities and businesses attributed in accordance with this
Article to the CarMax Group;
25
<PAGE>
(ii) a proportionate undivided interest in each and
every business, asset and liability attributed to the CarMax
Group equal to the Inter-Group Interest Fraction as of such
date;
(iii) all properties and assets transferred to the
Circuit City Group from the CarMax Group (other than pursuant
to paragraph B(7)(d)(iv) or (vi) of this Article) pursuant to
transactions in the ordinary course of business of both the
Circuit City Group and the CarMax Group or otherwise as the
Board of Directors may have directed as permitted by this
Article;
(iv) all properties and assets transferred to the
Circuit City Group from the CarMax Group in connection with a
reduction of the Number of Shares Issuable with Respect to the
Inter-Group Interest;
(v) the interest of the Corporation or any of its
subsidiaries in any business or asset acquired and any
liabilities assumed by the Corporation or any of its
subsidiaries outside the ordinary course of business and
attributed to the Circuit City Group, as determined by the
Board of Directors as contemplated by paragraph B(6)(a)(i) of
this Article; and
(vi) from and after the payment date of any dividend,
redemption or other distribution with respect to shares of
CarMax Stock (other than a dividend or other distribution
payable in shares of CarMax Stock, with respect to which
adjustment shall be made as provided in paragraph B(7)(s)(i)
of this Article, or in securities of the Corporation
attributed to the CarMax Group, for which provision shall be
made as set forth in the third to last sentence of this
definition), an amount of assets or properties previously
attributed to the CarMax Group of the same kind as were paid
in such dividend or other distribution with respect to shares
of CarMax Stock as have a Fair Value on the record date for
such dividend or distribution equal to the product of (1) the
Fair Value on such record date of the aggregate of such
dividend or distribution to holders of shares of CarMax Stock
declared multiplied by (2) a fraction the numerator of which
is equal to the Inter-Group Interest Fraction in effect on the
record date for such dividend or distribution and the
denominator of which is equal to the Outstanding CarMax
Fraction in effect on the record date for such dividend or
distribution;
provided that from and after any transfer of any assets or properties
from the Circuit City Group to the CarMax Group, the Circuit City Group
shall no longer include such assets or properties so transferred (other
than as reflected in respect of such a transfer by the Inter-Group
Interest Fraction, as provided by paragraph B(7)(d)(ii) of this
Article).
If the Corporation shall pay a dividend or make some other
distribution with respect to shares of CarMax Stock payable in
securities of the Corporation that are attributed to the CarMax Group
for purposes of this Article (other than CarMax Stock), the Circuit
City Group shall be deemed to hold an interest in the CarMax Group
equivalent to the number or amount of such securities that is equal to
the product of the number or amount of securities so distributed to
holders of CarMax Stock multiplied by the fraction specified in clause
(2) of paragraph B(7)(d)(vi) of this Article (determined as of the
record date for such distribution) and, to the extent interest is or
dividends are paid on the securities so distributed, the Circuit City
Group shall include, and there shall be transferred thereto from the
CarMax Group, a corresponding ratable amount of the kind of assets paid
as such interest or dividends as would have been paid in respect of
such securities so deemed to be held by the Circuit City Group if such
securities were outstanding. The Corporation may also, to the extent
the securities so paid as a dividend or other distribution to the
holders of CarMax Stock are Convertible Securities and at the time are
convertible into or exchangeable or exercisable for shares of CarMax
Stock, treat such Convertible Securities as are so deemed to be held by
the Circuit City Group to be deemed to be converted, exchanged or
exercised, and shall do so to the extent such Convertible Securities
are mandatorily converted, exchanged or exercised (and to the extent
the terms of such Convertible Securities require payment of
consideration for such conversion, exchange or exercise, the Circuit
City Group shall then no longer include an amount of the kind of
properties or assets required to be paid as such consideration for the
26
<PAGE>
amount of Convertible Securities deemed converted, exchanged or
exercised (and the CarMax Group shall be attributed such properties or
assets), in which case, from and after such time, the securities into
or for which such Convertible Securities so deemed to be held by the
Circuit City Group were so considered converted, exchanged or exercised
shall be deemed held by the Circuit City Group (as provided in clause
(3) of paragraph B(7)(s)(iii) of this Article) and such Convertible
Securities shall no longer be deemed to be held by the Circuit City
Group. A statement setting forth the election to effectuate any such
deemed conversion, exchange or exercise of Convertible Securities so
deemed to be held by the Circuit City Group and the properties or
assets, if any, to be attributed to the CarMax Group in consideration
of such conversion, exchange or exercise (if any) shall be filed in the
records of the actions of the Board of Directors and, upon such filing,
such deemed conversion, exchange or exercise shall be effectuated.
(e) "Circuit City Group Available Dividend Amount", on any
date, shall mean the excess, if any, of:
(i) an amount equal to the total assets of the
Circuit City Group less its total liabilities as of such date
determined in accordance with generally accepted accounting
principles as in effect at such time applied on a basis
consistent with that applied in determining the Circuit City
Group Net Earnings (Loss), over
(ii) except to the extent that these Amended and
Restated Articles of Incorporation permit otherwise, the
amount that would be needed to satisfy the preferential rights
to which holders of any Preferred Stock attributed to the
Circuit City Group are entitled upon dissolution of the
Corporation;
provided, that such excess shall be reduced by an amount sufficient to
ensure that the Circuit City Group would be able to pay its debts as
they become due in the usual course of business.
(f) "Circuit City Group Net Earnings (Loss)", for any period
through any date, shall mean the net earnings or loss of the Circuit
City Group for such period (or in respect of fiscal periods of the
Corporation commencing prior to the date of the first issuance of
CarMax Stock, the pro forma net earnings or loss of the Circuit City
Group for such period as if such date had been the first day of such
period) determined in accordance with generally accepted accounting
principles in effect at such time, reflecting income and expense of the
Corporation attributed to the Circuit City Group on a basis
substantially consistent with attributions of income and expense made
in the calculation of CarMax Group Net Earnings (Loss), including,
without limitation, corporate administrative costs, net interest and
other financial costs and income taxes.
(g) "Common Stock" shall mean the collective reference to the
Circuit City Stock and the CarMax Stock, and either may sometimes be
called a series of Common Stock.
(h) "Conversion Date" shall mean the date fixed by the Board
of Directors as the effective date for the conversion of shares of
Circuit City Stock or CarMax Stock, as the case may be, into shares of
CarMax Stock or Circuit City Stock, respectively (or another class or
series of common stock of the Corporation, as the case may be) as shall
be set forth in the notice to holders of shares of the series of Common
Stock subject to such conversion and to holders of any Convertible
Securities that are convertible into or exchangeable or exercisable for
shares of the series of Common Stock subject to such conversion
required pursuant to paragraph B(5)(d)(v) of this Article.
(i) "Convertible Securities" at any time shall mean any
securities of the Corporation or of any subsidiary thereof (other than
shares of the Common Stock), including warrants and options,
outstanding at such time that by their terms are convertible into or
exchangeable or exercisable for or evidence the right to acquire any
shares of either series of the Common Stock, whether convertible,
exchangeable or exercisable at such time or a later time or only upon
the occurrence of certain events, but in respect of antidilution
provisions of such securities only upon the effectiveness thereof.
27
<PAGE>
(j) "Disposition" shall mean a sale, transfer, assignment or
other disposition (whether by merger, consolidation, sale or
contribution of assets or stock or otherwise) of properties or assets
(including stock, other securities and goodwill).
(k) "Fair Value" shall mean, (i) in the case of equity
securities or debt securities of a class or series that has previously
been Publicly Traded for a period of at least 15 months, the Market
Value thereof (if such Market Value, as so defined, can be determined);
(ii) in the case of an equity security or debt security that has not
been Publicly Traded for at least 15 months or the Market Value of
which cannot be determined, the fair value per share of stock or per
other unit of such security, on a fully distributed basis, as
determined by an independent investment banking firm experienced in the
valuation of securities selected in good faith by the Board of
Directors, or, if no such investment banking firm is, as determined in
the good faith judgment of the Board of Directors, available to make
such determination, in good faith by the Board of Directors; (iii) in
the case of cash denominated in U.S. dollars, the face amount thereof
and in the case of cash denominated in other than U.S. dollars, the
face amount thereof converted into U.S. dollars at the rate published
in The Wall Street Journal on the date for the determination of Fair
Value or, if not so published, at such rate as shall be determined in
good faith by the Board of Directors based upon such information as the
Board of Directors shall in good faith determine to be appropriate in
accordance with good business practice; and (iv) in the case of
property other than securities or cash, the "Fair Value" thereof shall
be determined in good faith by the Board of Directors based upon such
appraisals or valuation reports of such independent experts as the
Board of Directors shall in good faith determine to be appropriate in
accordance with good business practice. Any such determination of Fair
Value shall be described in a statement filed with the records of the
actions of the Board of Directors.
(l) "Group" shall mean, as of any date, the Circuit City Group
or the CarMax Group, as the case may be.
(m) "Inter-Group Interest Fraction" as of any date shall mean
a fraction the numerator of which shall be the Number of Shares
Issuable with Respect to the Inter-Group Interest on such date and the
denominator of which shall be the sum of (A) such Number of Shares
Issuable with Respect to the Inter-Group Interest and (B) the aggregate
number of shares of CarMax Stock outstanding on such date. A statement
setting forth the Inter-Group Interest Fraction as of the record date
for any dividend or distribution on either series of the Common Stock,
as of the effective date of any conversion, exchange or exercise of
Convertible Securities into or for shares of CarMax Stock and as of the
end of each fiscal quarter of the Corporation shall be filed by the
Secretary of the Corporation in the records of the Board of Directors
of the Corporation not later than ten days after such date.
(n) "Market Capitalization" of any class or series of common
stock on any date shall mean the product of (i) the Market Value of one
share of such class or series of common stock on such date and (ii) the
number of shares of such class or series of common stock outstanding on
such date.
(o) "Market Value" of a share of any class or series of
capital stock of the Corporation on any day shall mean the average of
the high and low reported sales prices regular way of a share of such
class or series on such Trading Day or, in case no such reported sale
takes place on such Trading Day, the average of the reported closing
bid and asked prices regular way of a share of such class or series on
such Trading Day, in either case as reported on the New York Stock
Exchange Composite Tape or, if the shares of such class or series are
not listed or admitted to trading on such Exchange on such Trading Day,
on the principal national securities exchange in the United States on
which the shares of such class or series are listed or admitted to
trading or, if not listed or admitted to trading on any national
securities exchange on such Trading Day, on The Nasdaq National Market
or, if the shares of such class or series are not listed or admitted to
trading on any national securities exchange or quoted on The Nasdaq
National Market on such Trading Day, the average of the closing bid and
asked prices of a share of such class or series in the over-the-counter
market on such Trading Day as furnished by any New York Stock Exchange
member firm selected from time to time by the Corporation or, if such
28
<PAGE>
closing bid and asked prices are not made available by any such New
York Stock Exchange member firm on such Trading Day, the Fair Value of
a share of such class or series as set forth in clause (ii) of the
definition of Fair Value; provided that, for purposes of determining
the market value of a share of any class or series of capital stock for
any period, (i) the "Market Value" of a share of capital stock on any
day prior to any "ex-dividend" date or any similar date occurring
during such period for any dividend or distribution (other than any
dividend or distribution contemplated by clause (ii)(B) of this
sentence) paid or to be paid with respect to such capital stock shall
be reduced by the Fair Value of the per share amount of such dividend
or distribution and (ii) the "Market Value" of any share of capital
stock on any day prior to (A) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or
otherwise) of outstanding shares of such class or series of capital
stock occurring during such period or (B) any "ex-dividend" date or any
similar date occurring during such period for any dividend or
distribution with respect to such capital stock to be made in shares of
such class or series of capital stock or Convertible Securities that
are convertible, exchangeable or exercisable for such class or series
of capital stock shall be appropriately adjusted, as determined by the
Board of Directors, to reflect such subdivision, combination, dividend
or distribution.
(p) "Market Value Ratio of the Carmax Stock to the Circuit
City Stock" as of any date shall mean the fraction (which may be
greater or less than 1/1), expressed as a decimal (rounded to the
nearest five decimal places), of a share of Circuit City Stock (or
another class or series of common stock of the Corporation, if so
provided by paragraph B(5)(a) of this Article because Circuit City
Stock is not then Publicly Traded) to be issued in respect of a share
of CarMax Stock upon a conversion of CarMax Stock into Circuit City
Stock (or another class or series of common stock of the Corporation)
in accordance with paragraph B(5)(a) of this Article, based on the
ratio of the Market Value of a share of CarMax Stock to the Market
Value of a share of Circuit City Stock (or such other common stock) as
of such date, determined by the fraction the numerator of which shall
be the sum of (A) four times the average Market Value of one share of
CarMax Stock over the period of five consecutive Trading Days ending on
such date, (B) three times the average Market Value of one share of
CarMax Stock over the period of five consecutive Trading Days ending on
the fifth Trading Day prior to such date, (C) two times the average
Market Value of one share of CarMax Stock over the period of five
consecutive Trading Days ending on the 10th Trading Day prior to such
date and (D) the average Market Value of one share of CarMax Stock over
the period of five consecutive Trading Days ending on the 15th Trading
Day prior to such date and the denominator of which shall be the sum of
(A) four times the average Market Value of one share of Circuit City
Stock (or such other common stock) over the period of five consecutive
Trading Days ending on such date, (B) three times the average Market
Value of one share of Circuit City Stock (or such other common stock)
over the period of five consecutive Trading Days ending on the fifth
Trading Day prior to such date, (C) two times the average Market Value
of one share of Circuit City Stock (or such other common stock) over
the period of five consecutive Trading Days ending on the 10th Trading
Day prior to such date and (D) the average Market Value of one share of
Circuit City Stock (or such other common stock) over the period of five
consecutive Trading Days ending on the 15th Trading Day prior to such
date.
(q) "Market Value Ratio of the Circuit City Stock to the
Carmax Stock" as of any date shall mean the fraction (which may be
greater or less than 1/1), expressed as a decimal (rounded to the
nearest five decimal places), of a share of CarMax Stock (or another
class or series of common stock of the Corporation, if so provided by
paragraph B(5)(a) of this Article because CarMax Stock is not then
Publicly Traded) to be issued in respect of a share of Circuit City
Stock upon a conversion of Circuit City Stock into CarMax Stock (or
another class or series of common stock of the Corporation) in
accordance with paragraph B(5)(a) of this Article, based on the ratio
of the Market Value of a share of Circuit City Stock to the Market
Value of a share of CarMax Stock (or such other common stock) as of
such date, determined by the fraction the numerator of which shall be
the sum of (A) four times the average Market Value of one share of
Circuit City Stock over the period of five consecutive Trading Days
ending on such date, (B) three times the average Market Value of one
share of Circuit City Stock over the period of five consecutive Trading
Days ending on the fifth Trading Day prior to such date, (C) two times
the average Market Value of one share of Circuit City Stock over the
period of five consecutive Trading Days ending on the 10th Trading Day
prior to such date and (D) the average Market Value of one share of
29
<PAGE>
Circuit City Stock over the period of five consecutive Trading Days
ending on the 15th Trading Day prior to such date and the denominator
of which shall be the sum of (A) four times the average Market Value of
one share of CarMax Stock (or such other common stock) over the period
of five consecutive Trading Days ending on such date, (B) three times
the average Market Value of one share of CarMax Stock (or such other
common stock) over the period of five consecutive Trading Days ending
on the fifth Trading Day prior to such date, (C) two times the average
Market Value of one share of CarMax Stock (or such other common stock)
over the period of five consecutive Trading Days ending on the 10th
Trading Day prior to such date and (D) the average Market Value of one
share of CarMax Stock (or such other common stock) over the period of
five consecutive Trading Days ending on the 15th Trading Day prior to
such date.
(r) "Net Proceeds" shall mean, as of any date with respect to
any Disposition of any of the properties and assets attributed to the
Circuit City Group or the CarMax Group, as the case may be, an amount,
if any, equal to what remains of the gross proceeds of such Disposition
after payment of, or reasonable provision is made as determined by the
Board of Directors for, (A) any taxes payable by the Corporation (or
which would have been payable but for the utilization of tax benefits
attributable to the other Group) in respect of such Disposition or in
respect of any resulting dividend or redemption pursuant to paragraphs
B(5)(a)(i)(1)(a) or (b) of this Article, (B) any transaction costs,
including, without limitation, any legal, investment banking and
accounting fees and expenses and (C) any liabilities (contingent or
otherwise) of or attributed to such Group, including, without
limitation, any liabilities for deferred taxes or any indemnity or
guarantee obligations of the Corporation incurred in connection with
the Disposition or otherwise, and any liabilities for future purchase
price adjustments and any preferential amounts plus any accumulated and
unpaid dividends in respect of the Preferred Stock attributed to such
Group. For purposes of this definition, any properties and assets
attributed to the Group, the properties and assets of which are subject
to such Disposition, remaining after such Disposition shall constitute
"reasonable provision" for such amount of taxes, costs and liabilities
(contingent or otherwise) as the Board of Directors determines can be
expected to be supported by such properties and assets.
(s) "Number of Shares Issuable with Respect to the Inter-Group
Interest" shall be determined by the Board of Directors prior to the
first issuance of shares of CarMax Stock to be the number of shares of
CarMax Stock that initially represents 100% of the common shareholders'
equity of the Corporation attributable to the CarMax Group, which
determination shall be set forth in a statement filed with the records
of the actions of the Board of Directors; provided, however, that such
number shall from time to time thereafter be:
(i) adjusted, if before such adjustment such number
is greater than zero, as determined by the Board of Directors
to be appropriate to reflect equitably any subdivision (by
stock split or otherwise) or combination (by reverse stock
split or otherwise) of the CarMax Stock or any dividend or
other distribution of shares of CarMax Stock to holders of
shares of CarMax Stock or any reclassification of CarMax
Stock;
(ii) decreased (but to not less than zero), if before
such adjustment such number is greater than zero, by action of
the Board of Directors by (1) the number of shares of CarMax
Stock issued or sold by the Corporation that, immediately
prior to such issuance or sale, were included in the Number of
Shares Issuable with Respect to the Inter-Group Interest, (2)
the number of shares of CarMax Stock issued upon conversion,
exchange or exercise of Convertible Securities that,
immediately prior to the issuance or sale of such Convertible
Securities, were included in the Number of Shares Issuable
with Respect to the Inter-Group Interest, (3) the number of
shares of CarMax Stock issued by the Corporation as a dividend
or other distribution (including in connection with any
reclassification or exchange of shares) to holders of Circuit
City Stock, (4) the number of shares of CarMax Stock issued
upon the conversion, exchange or exercise of any Convertible
Securities issued by the Corporation as a dividend or other
distribution (including in connection with any
reclassification or exchange of shares) to holders of Circuit
30
<PAGE>
City Stock, or (5) the number (rounded, if necessary, to the
nearest whole number) equal to the quotient of (a) the
aggregate Fair Value as of the date of contribution of
properties or assets (including cash) transferred from the
CarMax Group to the Circuit City Group in consideration for a
reduction in the Number of Shares Issuable with Respect to the
Inter-Group Interest divided by (b) the Market Value of one
share of CarMax Stock as of the date of such transfer; and
(iii) increased by (1) the number of outstanding
shares of CarMax Stock repurchased by the Corporation for
consideration that is attributed as provided by paragraph
B(7)(d) of this Article to the Circuit City Group and (2) the
number (rounded, if necessary, to the nearest whole number)
equal to the quotient of (a) the Fair Value of properties or
assets (including cash) theretofore attributed as provided by
paragraph B(7)(d) of this Article to the Circuit City Group
that are contributed to the CarMax Group in consideration of
an increase in the Number of Shares Issuable with Respect to
the Inter-Group Interest, divided by (b) the Market Value of
one share of CarMax Stock as of the date of such contribution
and (3) the number of shares of CarMax Stock into or for which
Convertible Securities are deemed converted, exchanged or
exercised pursuant to the penultimate sentence of the
definition of "Circuit City Group" in paragraph B(7)(d) of
this Article.
(t) "Outstanding Carmax Fraction", as of any date, means the
fraction (which may simplify to 1/1) the numerator of which shall be
the number of shares of CarMax Stock outstanding on such date and the
denominator of which shall be the sum of the number of shares of CarMax
Stock outstanding on such date and the Number of Shares Issuable with
Respect to the Inter-Group Interest on such date. A statement setting
forth the Outstanding CarMax Fraction as of the record date for the
payment of any dividend or distribution on either series of the Common
Stock and as of the end of each fiscal quarter of the Corporation shall
be filed by the Secretary of the Corporation in the records of the
actions of the Board of Directors not later than ten days after such
date.
(u) "Publicly Traded" with respect to any security shall mean
(i) registered under Section 12 of the Securities Exchange Act of 1934,
as amended (or any successor provision of law), and (ii) listed for
trading on the New York Stock Exchange or the American Stock Exchange
(or any national securities exchange registered under Section 7 of the
Securities Exchange Act of 1934, as amended (or any successor provision
of law), that is the successor to either such exchange) or listed on
The Nasdaq Stock Market (or any successor market system).
(v) "Redemption Date" shall mean the date fixed by the Board
of Directors as the effective date for a redemption of shares of either
series of the Common Stock, as set forth in a notice to holders thereof
required pursuant to paragraphs B(5)(d)(iii), (iv) or (vi) of this
Article.
(w) "Related Business Transaction" means any Disposition of
all or substantially all the properties and assets attributed to the
Circuit City Group or the CarMax Group, as the case may be, in a
transaction or series of related transactions that result in the
Corporation receiving in consideration of such properties and assets
primarily equity securities (including, without limitation, capital
stock, debt securities convertible into or exchangeable for equity
securities or interests in a general or limited partnership or limited
liability company, without regard to the voting power or other
management or governance rights associated therewith) of any entity
which (i) acquires such properties or assets or succeeds (by merger,
formation of a joint venture or otherwise) to the business conducted
with such properties or assets or controls such acquiror or successor
and (ii) is primarily engaged or proposes to engage primarily in one or
more businesses similar or complementary to the businesses conducted by
such Group prior to such Disposition, as determined by the Board of
Directors.
(x) "Trading Day" shall mean each weekday other than any day
on which the relevant series of common stock of the Corporation is not
traded on any national securities exchange or quoted on The Nasdaq
National Market or in the over-the-counter market."
31
<PAGE>
C. Redesignation of Existing Common Stock. As of the effective date of
the Articles of Amendment pursuant to which this Section C is added to these
Amended and Restated Articles of Incorporation, and without any further action
on the part of the Corporation or its shareholders, each share of the Common
Stock then issued shall automatically be redesignated, changed and converted
into one fully paid and nonassessable share of Circuit City Stock.
ARTICLE VI
DIRECTORS
The number of directors shall be fixed by the bylaws. In the absence of
such a provision in the bylaws, the number of directors shall be ten. In no
event, however, shall the number of directors exceed seventeen. The directors of
the corporation shall be divided into three classes as nearly equal in number as
possible. The term of office of the first class of directors shall expire at the
first annual meeting of stockholders after the initial election dividing
directors into such classes, that of the second class shall expire at the second
annual meeting after such election and that of the third class at the third
annual meeting after such election. At each annual meeting of stockholders,
successors to the class of directors whose terms shall then expire and any other
nominees for election as a director of such class shall be elected to hold
office until the third succeeding annual meeting. If the number of directors is
changed, any newly created directorships or decrease in directorships shall be
so apportioned among the classes as to make all classes as nearly equal in
number as possible. Notwithstanding the foregoing, if the holders of one or more
series of Preferred Stock voting as a separate class shall become entitled to
elect members of the Board pursuant to the provisions of the Articles of Serial
Designation for such series, the terms of all members of the Board of Directors
previously elected shall expire at the time of such election and each director
shall then serve until the next meeting of stockholders at which directors are
elected; and whenever the holders of any series of Preferred Stock are no longer
entitled to so elect directors voting as a separate class, all of the directors
shall be elected by classes at the next annual meeting of stockholders held for
such purpose in the manner provided hereinabove in this paragraph with respect
to the initial election dividing directors into such classes. Subject to the
foregoing, at each annual meeting of stockholders the successors to the class of
directors whose terms shall then expire and any other nominees for election as a
director of such class shall be elected to hold office until the third
succeeding annual meeting. The aggregate number of vacancies resulting from an
increase in the number of directors which may be created and filled by action of
the Board of Directors between annual meetings of stockholders shall be limited
to two.
ARTICLE VIII
INDEMNIFICATION
A. Definitions. For purposes of this Article the following definitions
shall apply:
"Corporation" means this Corporation only and no predecessor entity or
other legal entity.
"Expenses" include counsel fees, expert witness fees, and costs of
investigation, litigation and appeal, as well as any amounts expended in
asserting a claim for indemnification.
"Liability" means the obligation to pay a judgment, settlement,
penalty, fine, or other such obligation, including, without limitation, any
excise tax assessed with respect to an employee benefit plan.
"Legal Entity" means a corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise.
"Predecessor Entity" means a legal entity the existence of which ceased
upon its acquisition by the Corporation in a merger or otherwise.
"Proceeding" means any threatened, pending, or completed action, suit,
proceeding or appeal whether civil, criminal, administrative or investigative
and whether formal or informal.
B. Indemnification of Directors and Officers. The Corporation shall
indemnify and may contract in advance to indemnify an individual who is, was or
is threatened to be made a party to a proceeding because he is or was a director
or officer of the Corporation or, while a director or officer of the
32
<PAGE>
Corporation, is or was serving the Corporation or any other legal entity in any
capacity at the request of the Corporation against all liabilities and
reasonable expenses incurred in the proceeding except such liabilities and
expenses as are incurred because of his willful misconduct or knowing violation
of the criminal law (regardless of whether the proceeding is by or in the right
of the Corporation). The determination that indemnification under this Paragraph
B is permissible and the evaluation as to the reasonableness of expenses in a
specific case shall be made, in the case of a director, as provided by law, and
in the case of an officer, as provided in Paragraph C of this Article; provided,
however, that if a majority of the directors of the Corporation has changed
after the date of the alleged conduct giving rise to a claim for
indemnification, such determination and evaluation shall, at the option of the
person claiming indemnification, be made by special legal counsel agreed upon by
the Board of Directors and such person. Unless a determination has been made
that indemnification is not permissible, the Corporation shall make advances and
reimbursements for expenses incurred by a director or officer in a proceeding
upon receipt of an undertaking from him to repay the same if it is ultimately
determined that he is not entitled to indemnification. Such undertaking shall be
an unlimited, unsecured general obligation of the director or officer and shall
be accepted without reference to his ability to make repayment. The termination
of a proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent shall not of itself create a presumption that
a director or officer acted in such a manner as to make him ineligible for
indemnification.
C. Indemnification of Others. The Corporation may, to a lesser extent
or to the same extent that the Corporation is required to provide
indemnification and make advances and reimbursements for expenses to its
directors and officers, provide indemnification and make advances and
reimbursements for expenses to its employees and agents, the directors,
officers, employees and agents of its subsidiaries and predecessor entities, and
any person serving any other legal entity in any capacity at the request of the
Corporation, and, if authorized by general or specific action of the Board of
Directors, may contract in advance to do so. The determination that
indemnification under this Paragraph C is permissible, the authorization of such
indemnification and the evaluation as to the reasonableness of expenses in a
specific case shall be made as authorized from time to time by general or
specific action of the Board of Directors, which action may be taken before or
after a claim for indemnification is made, or as otherwise provided by law. No
person's rights under Paragraph B of this Article shall be limited by the
provisions of this Paragraph C.
D. Miscellaneous. Every reference in this Article to persons who are
or may be entitled to indemnification shall include all persons who formerly
occupied any of the positions referred to and their respective heirs, executors
and administrators. Special legal counsel selected to make determinations under
this Article may be counsel for the Corporation. Indemnification pursuant to
this Article shall not be exclusive of any other right of indemnification to
which any person may be entitled including indemnification pursuant to a valid
contract, indemnification by legal entities other than the Corporation and
indemnification under policies of insurance purchased and maintained by the
Corporation or others. However, no person shall be entitled to indemnification
by the Corporation to the extent he is indemnified by another, including an
insurer. The Corporation is authorized to purchase and maintain insurance
against any liability it may have under this Article or to protect any of the
persons named above against any liability arising from their service to the
Corporation or any other legal entity at the request of the Corporation
regardless of the Corporation's power to indemnify against such liability. The
provisions of this Article shall not be deemed to prohibit the Corporation from
entering into contracts otherwise permitted by law with any individuals or legal
entities, including those named above, for the purposes of conducting the
business of the Corporation. If any provision of this Article or its application
to any person or circumstance is held invalid by a court of competent
jurisdiction, the invalidity shall not affect other provisions or applications
of this Article, and to this and the provisions of this Article are severable.
ARTICLE IX
LIMITATION OF LIABILITY
To the full extent that the Virginia Stock Corporation Act, as it now
exists or is hereafter amended, permits the limitation or elimination of the
liability of directors or officers, a director or officer of the Corporation
shall not be liable to the Corporation or its stockholders for monetary damages.
33
<PAGE>
ARTICLE X
VOTE TO AMEND OR RESTATE
As to each voting group entitled to vote on an amendment or restatement
of these Amended and Restated Articles of Incorporation the vote required for
approval shall be (i) the vote required by the Virginia Stock Corporation Act
(as applied without regard to the effect of clause (iii) of this Article) if the
effect of the amendment or restatement is (a) to reduce the shareholder vote
required to approve a merger, a statutory share exchange, a sale of all or
substantially all of the assets of the Corporation or the dissolution of the
Corporation, (b) to modify any provision of Article VI of these Amended and
Restated Articles of Incorporation, or (c) to delete all or any part of this
clause (i) of this Article; (ii) the vote required by the terms of these Amended
and Restated Articles of Incorporation, as amended or as restated from time to
time, if such terms require the approval of more than a majority of the votes
entitled to be cast thereon by such voting group; or (iii) a majority of the
votes entitled to be cast thereon if neither clause (i) nor clause (ii) of this
Article is applicable.
34
EXHIBIT 4.3(a)
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
OF THE DEFINITIONS
COMMONWEALTH OF VIRGINIA
THIS CERTIFICATE IS TRANSFERABLE CUSIP 172737 30 6
IN MINNEAPOLIS, MINNESOTA
OR NEW YORK, NEW YORK
CIRCUIT CITY STORES, INC.--CARMAX GROUP
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF CIRCUIT CITY STORES, INC. -- CARMAX
GROUP COMMON STOCK OF
CIRCUIT CITY STORES, INC., transferable upon the books of the Corporation by the
holder hereof in person or by a duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to the provisions of the Articles of
Incorporation and any amendments thereto of the Corporation, to all of which the
holder by the acceptance hereof assents. This Certificate is not valid until
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
Transfer Agent and Registrar
By
Authorized Signature
Michael T. Chalifoux Richard L. Sharp
Secretary President
[SEAL]
<PAGE>
CIRCUIT CITY STORES, INC.
A full statement of the designations, relative rights, preferences and
limitations applicable to each class of stock that the Corporation is authorized
to issue and the variations in rights, preferences and limitations determined
for the shares of each series of Common Stock and Preferred Stock that the
Corporation is authorized to issue so far as the same have been fixed and
determined (and the authority of the board of directors to determine variations
in the rights, preferences and limitations of subsequent series) will be
furnished to the holder hereof without charge upon request in writing to the
Secretary of the Corporation or to the Transfer Agent named on the face hereof.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT -Custodian.........
TEN ENT--as tenants by the entireties (Cust) (Minor)
with right of survivorship under Uniform Gifts to Minors
JT TEN --as joint tenants with right of Act...........
survivorship and not as tenants (State)
in common
</TABLE>
Additional abbreviations may also be used though not
in the above list.
For value received________hereby sell, assign and transfer
unto Please insert social security or other
identifying number of assignee
-----------------------
| |
|_______________________|
------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, including zip code, of assignee)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
_____________________________________________________________________ shares
of the capital stock represented by the within Certificate and
do hereby irrevocably constitute and appoint
____________________________________________________________________Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated______________________
-----------------------------------------------------------
NOTICE: THIS SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed: _________________________________________________
THIS SIGNATURE(S) SHOULD 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 S.E.C. RULE 17Ad-15.
The holder of this certificate is entitled to certain Rights as set forth in an
Amended and Restated Rights Agreement (the "Rights Agreement") between Circuit
City Stores, Inc. and Norwest Bank Minnesota, N.A. (the "Rights Agent") dated as
of the effective date of the Redesignation (as defined in the Rights Agreement),
as the same may be amended or supplemented from time to time, the terms of which
are hereby incorporated herein by reference and a copy of which is on file at
the principal executive office of Circuit City Stores, Inc. One or more
certificates evidencing such Rights have been delivered to and registered in the
name of Norwest Bank Minnesota, N.A. 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 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.
EXHIBIT 4.3(b)
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
OF THE DEFINITIONS
COMMONWEALTH OF VIRGINIA
THIS CERTIFICATE IS TRANSFERABLE CUSIP 172737 10 8
IN MINNEAPOLIS, MINNESOTA
OR NEW YORK, NEW YORK
CIRCUIT CITY STORES, INC.--CIRCUIT CITY GROUP
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF CIRCUIT CITY STORES, INC. -- CIRCUIT
CITY GROUP COMMON STOCK OF
CIRCUIT CITY STORES, INC., transferable upon the books of the Corporation by the
holder hereof in person or by a duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to the provisions of the Articles of
Incorporation and any amendments thereto of the Corporation, to all of which the
holder by the acceptance hereof assents. This Certificate is not valid until
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
Transfer Agent and Registrar
By
Authorized Signature
Michael T. Chalifoux Richard L. Sharp
Secretary President
[SEAL]
<PAGE>
CIRCUIT CITY STORES, INC.
A full statement of the designations, relative rights, preferences and
limitations applicable to each class of stock that the Corporation is authorized
to issue and the variations in rights, preferences and limitations determined
for the shares of each series of Common Stock and Preferred Stock that the
Corporation is authorized to issue so far as the same have been fixed and
determined (and the authority of the board of directors to determine variations
in the rights, preferences and limitations of subsequent series) will be
furnished to the holder hereof without charge upon request in writing to the
Secretary of the Corporation or to the Transfer Agent named on the face hereof.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM--as tenants in common UNIF GIFT MIN ACT-Custodian.........
TEN ENT--as tenants by the entireties (Cust) (Minor)
with right of survivorship under Uniform Gifts to Minors
JT TEN --as joint tenants with right of Act...........
survivorship and not as tenants (State)
in common
</TABLE>
Additional abbreviations may also be used though not
in the above list.
For value received________hereby sell, assign and transfer
unto Please insert social security or other
identifying number of assignee
------------------------
| |
| |
------------------------
------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, including zip code, of assignee)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
_____________________________________________________________________ shares
of the capital stock represented by the within Certificate and
do hereby irrevocably constitute and appoint
____________________________________________________________________Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Dated______________________
-----------------------------------------------------------
NOTICE: THIS SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed: ____________________________________________________
THIS SIGNATURE(S) SHOULD 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 S.E.C. RULE 17Ad-15.
The holder of this certificate is entitled to certain Rights as set forth in an
Amended and Restated Rights Agreement (the "Rights Agreement") between Circuit
City Stores, Inc. and Norwest Bank Minnesota, N.A. (the "Rights Agent") dated as
of the effective date of the Redesignation (as defined in the Rights Agreement),
as the same may be amended or supplemented from time to time, the terms of which
are hereby incorporated herein by reference and a copy of which is on file at
the principal executive office of Circuit City Stores, Inc. One or more
certificates evidencing such Rights have been delivered to and registered in the
name of Norwest Bank Minnesota, N.A. 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 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.
EXHIBIT 4.6
AMENDED AND RESTATED
RIGHTS AGREEMENT
between
CIRCUIT CITY STORES, INC.
and
NORWEST BANK MINNESOTA, N.A.
Dated as of February ___, 1997
<PAGE>
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
-i-
<PAGE>
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>
-ii-
<PAGE>
RIGHTS AGREEMENT
This Amended and Restated Rights Agreement, is entered into as of
February___, 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.
<PAGE>
Each Circuit City Right, as so redesignated, will continue to represent
the right to purchase one four-hundredths of a Series E Preferred Share having
the rights and preferences set forth in Exhibit A-1 hereto, and each CarMax
Right will represent the right to purchase one four-hundredths of a share of
Cumulative Participating Preferred Stock, Series F, par value $20.00 per share
(the "Series F Preferred Shares"), of the Company having the rights and
preferences set forth in Exhibit A-2 hereto, in each such case upon the terms
and subject to the conditions herein set forth.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of Common Shares representing 15% or
more of the total Voting Rights of all the Common Shares then outstanding, but
shall not include the Company, any wholly-owned Subsidiary (as such term is
hereinafter defined) of the Company or any employee benefit plan of the Company
or any Subsidiary of the Company, or any Person or entity holding Common Shares
for or pursuant to the terms of any such plan.
(b) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as in effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of
and shall be deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has (A) the right to
acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding (whether or not in writing), or upon the exercise of
conversion rights, exchange rights, rights (other than these Rights),
warrants or options, or otherwise; provided, however, that a Person
shall not be deemed the Beneficial Owner of, or to beneficially own,
(1) securities tendered pursuant to a tender or exchange offer made by
or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
-2-
<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.
-3-
<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.
-4-
<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
-5-
<PAGE>
7(e). (A Common Share and its associated Right or Rights before the Distribution
Date shall be collectively referred to as the "Unit".) Until the Distribution
Date, the Rights issued from time to time hereunder shall be evidenced
collectively by one or more certificates (the "Rights Certificates") delivered
to and registered in the name of the Rights Agent, as Rights Agent under this
Agreement; but the issuance of the Rights hereunder shall not be affected by any
failure to deliver a new or replacement Rights Certificate to the Rights Agent
in respect thereof. The initial Rights Certificate and any additional or
replacement Rights Certificates delivered to the Rights Agent shall, prior to
the Distribution Date, have a legend set forth on the face thereof to the effect
that the Rights represented thereby shall not be exercisable until the
Distribution Date. As soon as practicable after the Company has notified the
Rights Agent of the occurrence of the Distribution Date, the Rights Agent will
send, by first-class, insured, postage prepaid mail, to each record holder of
Common Shares as of the close of business on the Distribution Date, at the
address of such holder shown on the records of the Company, a Rights
Certificate, in substantially the form of Exhibit B-1 hereto (in the case of a
Circuit City Right) or Exhibit B-2 hereto (in the case of a CarMax Right),
evidencing one Right for each Common Share so held. As of the Distribution Date,
the Rights will be evidenced solely by such Rights Certificates. The failure to
mail any such Rights Certificate shall not affect the legality or validity of
the Rights.
(b) On the Record Date or as soon as practicable thereafter,
the Company sent a copy of a Summary of Rights to Purchase Preferred Shares in
substantially the form which was attached as Exhibit C to the Original Agreement
prior to the March 5, 1996 amendment and restatement (the "Summary of Rights"),
by first-class, postage prepaid mail, to each record holder of the Company's
then-existing Common Stock as of the close of business on the Record Date, at
the address of such holder shown on the records of the Company. The failure to
send a copy of a Summary of Rights shall not affect the legality or validity of
the Rights.
(c) Certificates for Common Shares issued after the date
hereof but prior to the earliest of the Distribution Date or the Redemption Date
or the Final Expiration Date shall have impressed on, printed on, written on or
otherwise affixed to them the following legend:
The holder of this certificate is entitled to certain Rights
as set forth in an Amended and Restated Rights Agreement
between Circuit City Stores, Inc. and Norwest Bank Minnesota,
N.A. (the "Rights Agent"), dated as of ________________ as the
same may be amended or supplemented from time to time
hereafter (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is
on file at the principal executive offices of Circuit City
Stores, Inc. One or more certificates evidencing such Rights
have been delivered to and registered in the name of [INSERT
NAME OF RIGHTS AGENT], as Rights Agent under the Rights
Agreement. Circuit City Stores, Inc., will mail to the holder
of this certificate a copy of the Rights Agreement without
charge after receipt of a written request
-6-
<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
-7-
<PAGE>
hereby may become null and void in the circumstance specified
in Section 7(e) of such Agreement.
Section 5. Countersignature and Registration. The Rights
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President, any Executive Vice President, or any Senior Vice
President, and by the Secretary, an Assistant Secretary, Treasurer or an
Assistant Treasurer of the Company, either manually or by facsimile signature,
and have affixed thereto the Company's seal or a facsimile thereof. The Rights
Certificates shall not be valid for any purpose unless manually countersigned by
an authorized signatory of the Rights Agent. In case any officer of the Company
who shall have signed any of the Rights Certificates shall cease to be such
officer of the Company before countersignature by the Rights Agent and issuance
and delivery by the Company, such Rights Certificates, nevertheless, may be
countersigned by the Rights Agent, and issued and delivered by the Company with
the same force and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
The Rights Agent will keep or cause to be kept, at its
principal offices, books for registration and transfer of the Rights
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Rights Certificates, the number of Rights
evidenced on its face by each of the Rights Certificates and the date of each of
the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof,
at or prior to the close of business on the earlier of the Redemption Date or
the Final Expiration Date (as such terms are defined in Section 7 hereof), any
Rights Certificate or Rights Certificates (other than Rights Certificates
representing Rights that have become void pursuant to Section 7(e)) may be
transferred, split up, combined or exchanged for another Rights Certificate or
Rights Certificates, entitling the registered holder to purchase a like number
of one four-hundredths of a share of Preferred Shares (or, following a
Triggering Event, Common Shares, other securities, cash or other assets, as the
case may be) as the Rights Certificate or Rights Certificates surrendered then
entitled such holder (or former holder in the case of a transfer) to purchase.
Any registered holder desiring to transfer, split up, combine or exchange any
Rights Certificate shall make such request in writing delivered to the Rights
Agent, and shall surrender the Rights Certificate or Rights Certificates to be
transferred, split up, combined or exchanged at the principal office or offices
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered
-8-
<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.
-9-
<PAGE>
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one fourhundredths of a Preferred Share (or other
shares, securities, cash or other assets, as the case may be) to be purchased as
set forth below and an amount equal to any applicable transfer tax required to
be paid by the holder of such Rights Certificate in accordance with Section 9,
the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i)
(A) requisition from any transfer agent of the Preferred Shares (or make
available, if the Rights Agent is the transfer agent for such shares)
certificates for the total number of one four-hundredths of a Preferred Share to
be purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) if the Company shall have elected to
deposit the total number of Preferred Shares issuable upon exercise of the
Rights hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one four-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the depositary
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash, if any, to be paid in lieu of issuance of fractional
shares in accordance with Section 14, (iii) promptly after receipt of such
certificates or depositary receipts, cause the same to be delivered to or upon
the order of the registered holder of such Rights Certificate, registered in
such name or names as may be designated by such holder and (iv) when
appropriate, after receipt, promptly deliver such cash, if any, to or upon the
order of the registered holder of such Rights Certificate. The payment of the
Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii)
hereof) shall be made (x) in cash or by certified bank check or bank draft
payable to the order of the Company, or (y) at the election of the Company with
respect to all exercisable Rights by delivery of a certificate or certificates
(with appropriate stock powers executed in blank attached thereto) evidencing a
number of Common Shares equal to the then Purchase Price divided by the closing
price (as determined pursuant to Section 11(d) hereof) per Common Share on the
Trading Day (as hereinafter defined) immediately preceding the date of such
exercise or (z) in the event the Company permits payment with Common Shares, a
combination thereof. In the event the Company elects to accept Common Shares in
payment of the Purchase Price, it shall notify the Rights Agent of such election
and of the closing price per Common Share on the Trading Date immediately
preceding the date of exercise to which such election relates. In the event that
the Company is obligated to issue other securities (including Common Shares) of
the Company, pay cash and/or distribute other property pursuant to Section 11(a)
hereof, the Company will make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution by the
Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate
shall exercise fewer than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the
-10-
<PAGE>
registered holder of such Rights Certificate or to his duly authorized assigns,
subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such, or (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee before or concurrently
with the Acquiring Person becoming such and receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person to holders of equity interests in such Acquiring Person or to any Person
with whom the Acquiring Person has any continuing agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer that the Board
of Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall be void without any further action and any holder of such
Rights shall thereafter have no right whatsoever with respect to such Rights
(including, without limitation, the right to exercise such Rights) under any
provision of this Agreement or otherwise. No Rights Certificate shall be issued
pursuant to Section 3 that represents Rights beneficially owned by an Acquiring
Person whose Rights would be void pursuant to the preceding sentence or any
Associate or Affiliate thereof; no Rights Certificate shall be issued at any
time upon the transfer of any Rights to an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate thereof
or to any nominee of such Acquiring Person, Associate or Affiliate; and any
Rights Certificate delivered to the Rights Agent for transfer to an Acquiring
Person whose Rights would be void pursuant to the preceding sentence shall be
cancelled. The Company shall use all reasonable efforts to insure that the
provisions of this Section 7(e) and Section 4(b) are complied with, but shall
have no liability to any holder of Rights Certificates or any other Person as a
result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the form
of election to purchase set forth on the reverse side of the Rights Certificate
surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights
Certificates. All Rights Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the Company
or to any of its agents, be delivered to the
-11-
<PAGE>
Rights Agent for cancellation or in cancelled form, or, if surrendered to the
Rights Agent, shall be cancelled by it, and no Rights Certificates shall be
issued in lieu thereof except as expressly permitted by any of the provisions of
this Rights Agreement. The Company shall deliver to the Rights Agent for
cancellation and retirement, and the Rights Agent shall so cancel and retire,
any other Rights Certificate purchased or acquired by the Company otherwise than
upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights
Certificates to the Company.
Section 9. Reservation and Availability of Preferred Shares
and Common Shares. (a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued Preferred Shares
(and, following the occurrence of a Triggering Event, out of its authorized and
unissued Common Shares and/or other securities) the number of Preferred Shares
(and, following the occurrence of a Triggering Event, Common Shares and/or other
securities) that, as provided in this Agreement, will be sufficient to permit
the exercise in full of all outstanding Rights.
(b) So long as the Preferred Shares (and, following the
occurrence of a Triggering Event, Common Shares and/or other securities)
issuable and deliverable upon the exercise of Rights may be listed on any
national securities exchange, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable (but only to the
extent that it is reasonably likely that the Rights will be exercised), all
shares reserved for such issuance to be listed on such exchange upon official
notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined pursuant to this
Agreement (including in accordance with Section 11(a)(iii) hereof), a
registration statement under the Securities Act of 1933 (the "Act"), with
respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, (iii) cause such registration statement
to remain effective (with a prospectus at all times meeting the requirements of
the Act) until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the Final Expiration Date, and (iv)
obtain such regulatory approvals as may be necessary for it to issue securities
purchasable upon the exercise of the Rights. The Company will also take such
action as may be appropriate under, or to ensure compliance with, the securities
or "blue sky" laws of the various states in connection with the exercisability
of the Rights. The Company may temporarily suspend, for a period of time not to
exceed 90 days after the date set forth in clause (i) of the first sentence of
this Section 9(c), the exercisability of the Rights in order to prepare and file
such registration statement and permit it to become effective or to obtain any
other required regulatory approval in connection with the exercisability of the
Rights. Upon any such suspension, the Company shall issue a public announcement
stating, and notify the Rights
-12-
<PAGE>
Agent, that the exercisability of the Rights has been temporarily suspended, as
well as a public announcement at such time as the suspension is no longer in
effect. In addition, if the Company shall determine that a registration
statement is required following the Distribution Date, the Company may
temporarily suspend the exercisability of the Rights until such time as a
registration statement has been declared effective. In the event any Right is
exercised prior to the occurrence of a Section 11(a)(ii) Event or a Section 13
Event, the Company may defer for up to 90 days the issuance of Preferred Shares
upon such exercise in order to obtain any necessary regulatory approval. If,
within 90 days after such exercise of any Right, the Company is unable to obtain
any required regulatory approval for the issuance of the Preferred Shares, or if
the Company is otherwise unable to issue the Preferred Shares under the terms of
its Articles of Restatement or for any other reason, then the Company shall
substitute for the Preferred Shares otherwise issuable upon exercise of the
Right (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or
other equity securities of the Company, except to the extent that the Company
has not obtained any necessary regulatory approval for such issuance, (4) debt
securities of the Company, except to the extent that the Company has not
obtained any necessary regulatory approval for such issuance, (5) other assets,
or (6) any combination of the foregoing, having an aggregate value equal to the
Current Market Price (as defined in Section 11(d)(ii)) of the Preferred Shares
for which such Right is exercisable, where such aggregate value has been
determined by the Board of Directors of the Company based upon the advice of a
nationally recognized investment banking firm selected by the Board of Directors
of the Company. Notwithstanding any provision of this Agreement to the contrary,
the Rights shall not be exercisable in any jurisdiction if the requisite
qualification in such jurisdiction shall not have been obtained or the exercise
thereof shall not be permitted under applicable law.
(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all one four-hundredths of a
Preferred Share (and, following the occurrence of a Triggering Event, Common
Shares and/or other securities) delivered upon exercise of Rights shall, at the
time of delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(e) The Company further covenants and agrees that it will pay
when due and payable any and all federal and state transfer taxes and charges
which may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificate for a number of one four-hundredths of a
Preferred Share (or Common Shares and/or other securities, as the case may be)
upon the exercise of Rights. The Company shall not, however, be required to pay
any transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a person other than, or the issuance or delivery of a
number of one fourhundredths of a Preferred Share (or Common Shares and/or other
securities, as the case may be) in respect of a name other than that of, the
registered holder of the Rights Certificate evidencing Rights surrendered for
exercise or to issue or deliver any certificates for a number of one
four-hundredths of a Preferred Share (or Common Shares and/or other securities,
as the case may be) upon the exercise of any Rights until any such tax shall
have been paid (any such
-13-
<PAGE>
tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose
name any certificate for a number of one four-hundredths of a Preferred Share is
issued upon the exercise of Rights shall for all purposes be deemed to have
become the holder of record of the Preferred Shares (or Common Shares and/or
other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Shares (or
Common Shares and/or other securities, as the case may be) transfer books of the
Company are closed, such person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Shares (or Common
Shares and/or other securities, as the case may be) transfer books of the
Company are open. Prior to the exercise of the Rights evidenced thereby, the
holder of a Rights Certificate shall not be entitled to any rights of a
shareholder of the Company with respect to shares for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights. The Purchase Price, the number and kind of shares
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on any series of the Preferred
Shares payable in Preferred Shares, (B) subdivide any series of the outstanding
Preferred Shares, (C) combine any series of the outstanding Preferred Shares
into a smaller number of Preferred Shares or (D) issue any shares of its capital
stock in a reclassification of any series of the Preferred Shares (including any
such reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately adjusted
so that the holder of any Right exercised after such time shall be entitled to
receive, upon payment of the Purchase Price then in effect, the aggregate number
and kind of shares of capital stock which, if such Right had been exercised
immediately prior to such date and at a time when the Preferred Shares transfer
books of the Company were open, he would have owned upon such exercise and been
entitled to receive by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would require an adjustment under
both Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this
Section 11(a)(i)
-14-
<PAGE>
shall be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii).
(ii) In the event
(A) any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, at any time after the date
of this Agreement, directly or indirectly, (1) shall merge
into the Company or otherwise combine with the Company and the
Company shall be the continuing or surviving corporation of
such merger or combination and all the Common Shares of the
Company shall remain outstanding and not changed into or
exchanged for stock or other securities of any other Person or
the Company or cash or any other property, (2) shall, in one
or more transactions, transfer any assets to the Company or
any of its Subsidiaries in exchange (in whole or in part) for
shares of any class or series of capital stock of the Company
or any of its Subsidiaries or for securities exercisable for
or convertible into shares of any class or series of capital
stock of the Company or any of its Subsidiaries or otherwise
obtain from the Company or any of its Subsidiaries, with or
without consideration, any additional shares of any class or
series of capital stock of the Company or any of its
Subsidiaries or securities exercisable for or convertible into
shares of any class or series of capital stock of the Company
or any of its Subsidiaries (other than as part of a pro rata
distribution to all holders of such shares of any class or
series of capital stock of the Company or any of its
Subsidiaries), (3) shall sell, purchase, lease, exchange,
mortgage, pledge, transfer or otherwise acquire or dispose (in
one or more transactions), to, from, with or of, as the case
may be, the Company or any of its Subsidiaries, assets
(including securities) on terms and conditions less favorable
to the Company than the Company would be able to obtain in
arm's-length negotiation with an unaffiliated third party
(other than pursuant to a transaction set forth in Section
13(a) hereof), (4) shall sell, purchase, lease, exchange,
mortgage, pledge, transfer or otherwise acquire or dispose (in
one or more transactions), to, from, with or of, as the case
may be, the Company or any of the Company's Subsidiaries
(other than incidental to the lines of business, if any,
engaged in as of the date hereof between the Company and such
Acquiring Person or Associate or Affiliate) assets having an
aggregate fair market value of more than $2 million (other
than pursuant to a transaction set forth in Section 13(a)
hereof), (5) shall receive any compensation from the Company
or any of the Company's Subsidiaries other than compensation
for full-time employment as a regular employee at rates in
accordance with the Company's (or its Subsidiaries') past
practices, or (6) shall receive the benefit, directly or
indirectly (except proportionately as a shareholder and except
if resulting from a requirement of law or governmental
regulation), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax
advantage provided by the Company or any of its Subsidiaries,
or (B)
-15-
<PAGE>
any Person shall become the Beneficial Owner of Common Shares
representing 15% or more of the total Voting Rights of all the
Common Shares of the Company then outstanding except pursuant
to a tender offer made in the manner prescribed by Section
14(d) of the Exchange Act and the rules and regulations
promulgated thereunder; provided, however, that (a) such
tender offer shall provide for the acquisition of all of the
outstanding shares of Circuit City Stock and CarMax Stock held
by any Person other than such Acquiring Person and its
Associates or Affiliates for cash and (b) a majority of the
Continuing Directors shall have determined that such tender
offer is fair, or (C) during such time as there is an
Acquiring Person, there shall be any reclassification of
securities (including any reverse stock split), or
recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or
any other transaction or series of transactions involving the
Company or any of its Subsidiaries (whether or not with or
into or otherwise involving an Acquiring Person), other than a
transaction or transactions to which the provisions of Section
13(a) apply, which has the effect, directly or indirectly, of
increasing by more than 1% the proportionate share of the
outstanding shares of any class or series of equity securities
or of securities exercisable for or convertible into
securities of the Company or any of its Subsidiaries which is
directly or indirectly owned by any Acquiring Person or any
Associate or Affiliate of any Acquiring Person,
then, promptly following the occurrence of any event described in Section
11(a)(ii)(A), (B) or (C) hereof, proper provision shall be made so that each
holder of a Right, except as provided below and in Section 7(e), shall
thereafter have the right to receive, upon exercise thereof at the then current
Purchase Price, in accordance with the terms of this Agreement, in lieu of a
number of one four-hundredths of a Preferred Share, such number of shares of
Circuit City Stock (in the case of a Circuit City Right) or CarMax Stock (in the
case of a CarMax Right) as shall equal the result obtained by (x) multiplying
the then current Purchase Price by the then number of one four-hundredths of a
Preferred Share for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event, and dividing that product (which
product, following such first occurrence, shall thereafter be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement) by (y)
50% of the Current Market Price per share of the applicable series of Common
Shares (determined pursuant to Section 11(d)) on the date of such first
occurrence (such number of shares, the "Adjustment Shares"); provided, that the
Purchase Price and the number of Adjustment Shares shall be further adjusted as
provided in this Agreement to reflect any events occurring after the date of
such first occurrence.
(iii) In the event that the aggregate number of shares of
Circuit City Stock or CarMax Stock authorized by the Company's Articles of
Restatement but not outstanding or reserved for issuance for purposes other than
upon exercise of the Rights is not sufficient to permit the exercise in full of
the Circuit City Rights or CarMax Rights, as the case may be, in
-16-
<PAGE>
accordance with the foregoing subparagraph (ii) of this Section 11(a), or if any
necessary regulatory approval for such issuance has not been obtained by the
Company, the Company shall: (A) determine the excess of (1) the value of the
Adjustment Shares issuable upon the exercise of each such Right (the "Current
Value") over (2) the Purchase Price (such excess, the "Spread"), and (B) with
respect to each such Right, make adequate provision to substitute for the
Adjustment Shares, upon exercise of such Rights, (1) cash, (2) a reduction in
the Purchase Price, (3) Common Shares or other equity securities of the Company
(including, without limitation, shares or units of shares of preferred stock
which the Board of Directors of the Company has deemed to have the same value as
shares of Circuit City Stock or CarMax Stock, as applicable (such shares or
units of shares of preferred stock are herein called "common stock
equivalents"), except to the extent that the Company has not obtained any
necessary regulatory approval for such issuance, (4) debt securities of the
Company, except to the extent that the Company has not obtained any necessary
regulatory approval for such issuance, (5) other assets, or (6) any combination
of the foregoing, having an aggregate value equal to the Current Value, where
such aggregate value has been determined by the Board of Directors of the
Company based upon the advice of a nationally recognized investment banking firm
selected by the Board of Directors of the Company; provided, however, if the
Company shall not have made adequate provision to deliver value pursuant to
clause (B) above within 30 days following the later of (x) the first occurrence
of a Section 11(a)(ii) Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y) being
referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company
shall be obligated, subject to Section 7(e), to deliver, upon the surrender for
exercise of each such Right and without requiring payment of the Purchase Price,
Common Shares (to the extent available), except to the extent that the Company
has not obtained any necessary regulatory approval for such issuance, and then,
if necessary, cash, which shares and/or cash have an aggregate value equal to
the Spread. If the Board of Directors of the Company shall determine in good
faith that it is likely that sufficient additional Common Shares could be
authorized for issuance upon exercise in full of such Rights or that any
necessary regulatory approval for such issuance will be obtained, the 30-day
period set forth above may be extended to the extent necessary, but not more
than 90 days after the Section 11(a)(ii) Trigger Date, in order that the Company
may seek shareholder approval for the authorization of such additional shares or
take action to obtain such regulatory approval (such period, as it may be
extended, the "Substitution Period"). To the extent that the Company determines
that some action need be taken pursuant to the first and/or second sentences of
this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding Circuit City
Rights or CarMax Rights, as the case may be, and (y) may suspend the
exercisability of such Rights until the expiration of the Substitution Period in
order to seek any authorization of additional shares, to take any action to
obtain any required regulatory approval and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of such Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii), the
value of the Common Shares
-17-
<PAGE>
shall be the Current Market Price (as determined pursuant to Section 11(d)
hereof) per share of the Common Shares on the Section 11(a)(ii) Trigger Date and
the value of any "common stock equivalent" shall be deemed to have the same
value as the Common Shares on such date.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of any series of
Preferred Shares entitling them (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase such Preferred Shares (or
shares having the same rights, privileges and preferences as such Preferred
Shares ("equivalent preferred shares") or securities convertible into such
Preferred Shares or equivalent preferred shares at a price per Common Share or
equivalent preferred share (or having a conversion price per share, if a
security convertible into such Preferred Shares or equivalent preferred shares)
less than the Current Market Price per share of such Preferred Shares (as
defined in Section 11(d)) on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of such Preferred Shares outstanding on
such record date plus the number of such Preferred Shares which the aggregate
offering price of the total number of such Preferred Shares or equivalent
preferred shares or both so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Current Market Price and the denominator of which shall be the number of such
Preferred Shares outstanding on such record date plus the number of additional
such Preferred Shares or equivalent preferred shares or both to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible). In case such subscription price may be paid
in a consideration part or all of which may be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Preferred Shares of such series owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed; and in the event that such rights or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making
of a distribution to all holders of any series of Preferred Shares (including
any such distribution made in connection with a consolidation or merger in which
the Company is the continuing corporation) of evidences of indebtedness or
assets (other than a regular quarterly cash dividend or a dividend payable in
such Preferred Shares) or subscription rights or warrants (excluding those
referred to in Section 11(b)), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the Current Market Price per share of such Preferred Shares (as defined
in Section 11(d)) on such record date, less the fair market value (as determined
in good faith by the Board of Directors of the Company,
-18-
<PAGE>
whose determination shall be described in a statement filed with the Rights
Agent) of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to one such
Preferred Share and the denominator of which shall be such Current Market Price
per share of such Preferred Shares. Such adjustments shall be made successively
whenever such a record date is fixed; and in the event that such distribution is
not so made, the Purchase Price shall again be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder (other
than computations made pursuant to Section 11(a)(iii) hereof), the "Current
Market Price" per share of the Common Shares on any date shall be deemed to be
the average of the daily closing prices per share of such Common Shares for the
30 consecutive Trading Days (as such term is hereinafter defined) immediately
prior to such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "Current Market Price" per share of the Common Shares on
any date shall be deemed to be the average of the daily closing prices per share
of such Common Shares for the ten consecutive Trading Days immediately following
such date; provided, however, that in the event that the Current Market Price
per share of the Common Shares is determined during a period following the
announcement by the issuer of such Common Shares of (A) a dividend or
distribution on such Common Shares payable in such Common Shares or securities
convertible into such Common Shares (other than the Rights), or (B) any
subdivision, combination or reclassification of such Common Shares, and prior to
the expiration of the requisite 30 Trading Days or ten Trading Days, as set
forth above, after the ex-dividend date for such dividend or distribution or the
record date for such subdivision, combination or reclassification, then, and in
each such case, the Current Market Price shall be appropriately adjusted to
reflect the Current Market Price per Common Share equivalent. The closing price
for each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common Shares are not listed
or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Common Shares
are listed or admitted to trading or, if the Common Shares are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then
in use, or, if on any such date the Common Shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Shares selected by the
Board of Directors of the Company. If on any such date no market maker is making
a market in the Common Shares, the fair value of such shares on such date as
determined in good faith by the Board of Directors of the Company shall be used.
The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Common Shares are listed or admitted
-19-
<PAGE>
to trading is open for the transaction of business or, if the Common Shares are
not listed or admitted to trading on any national securities exchange, a
Business Day. If the Common Shares are not publicly held or not so listed or
traded, "Current Market Price" per share shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
"Current Market Price" per share of the Preferred Shares shall be determined in
the same manner as set forth above for Common Shares in clause (i) of this
Section 11(d) (other than the last sentence thereof). If the Current Market
Price per share of either series of Preferred Shares cannot be determined in the
manner provided above or if either series of Preferred Shares is not publicly
held or listed or traded in a manner described in clause (i) of this Section
11(d), the "Current Market Price" per share of such series of Preferred Shares
shall be conclusively deemed to be (A) in the case of the Series E Preferred
Stock, the Current Market Price per share of the Circuit City Stock
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by 400 and (B) in the
case of the Series F Preferred Stock, the Current Market Price per share of the
CarMax (appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof), multiplied by 400. If
neither the applicable series of Common Shares nor the applicable series of
Preferred Shares are publicly held or so listed or traded, "Current Market
Price" per share shall mean the fair value per share as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be conclusive for all
purposes. For all purposes of this Agreement, the "Current Market Price" of one
four-hundredths of a Preferred Share shall be equal to the "Current Market
Price" of one Preferred Share divided by 400.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least l% in the Purchase Price; provided,
however, that any adjustments which by reason of this Section 11(e) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be made to
the nearest cent or to the nearest ten-thousandth of a Common Share or other
share or onemillionth of a Preferred Share, as the case may be. Notwithstanding
the first sentence of this Section 11(e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three years from the
date of the transaction which requires such adjustment or (ii) the date of the
expiration of the right to exercise any Rights.
(f) If, as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock of the Company
other than Preferred Shares, thereafter the number of such other shares so
receivable upon exercise of any Right and the Purchase Price thereof shall be
subject to adjustment from time to time in a manner and on terms as nearly
-20-
<PAGE>
equivalent as practicable to the provisions with respect to the Preferred Shares
contained in Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and
the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred
Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one four-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Section 11(b) and (c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price per one four-hundredths of a
Preferred Share, that number of one four-hundredths of a Preferred Share
(calculated to the nearest one one-millionth of a Preferred Share) obtained by
(i) multiplying (x) the number of one four-hundredths of a share covered by a
Right immediately prior to this adjustment by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price and (ii) dividing the
product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in substitution
for any adjustment in the number of one four-hundredths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment in the number of Rights shall be exercisable for the number of
one four-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement, and notify the Rights Agent, of its
election to adjust the number of Rights, indicating the record date for the
adjustment, and, if known at the time, the amount of the adjustment to be made.
This record date may be the date on which the Purchase Price is adjusted or any
day thereafter, but, if the Rights Certificates have been issued, shall be at
least ten days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights
pursuant to this Section 11(i), the Company shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates evidencing, subject to Section 14 hereof, the
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be distributed to
such holders of record in substitution and replacement for the Rights
Certificates held by such holders prior to the date of adjustment,
-21-
<PAGE>
and upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one four-hundredths of a Preferred Share issuable upon
the exercise of a Right, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one four-hundredths of a
share and the number of four-hundredths of a share which were expressed in the
initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one four-hundredths of the then par value, if
any, of the number of one four-hundredths of a Preferred Share issuable upon
exercise of the Rights, the Company shall take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Preferred Shares at such
adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
of the number of one four-hundredths of a Preferred Share and other capital
stock or securities of the Company, if any, issuable upon such exercise over and
above the number of one four-hundredths of a Preferred Share and other capital
stock or securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any
consolidation or subdivision of the Preferred Shares, issuance wholly for cash
of any of the Preferred Shares at less than the Current Market Price, issuance
wholly for cash of Preferred Shares or securities which by their terms are
convertible into or exchangeable for Preferred Shares, dividends on Preferred
Shares payable in Preferred Shares or issuance of rights, options or warrants
referred to in this Section 11, hereafter made by the Company to holders of its
Preferred Shares shall not be taxable to such shareholders.
-22-
<PAGE>
(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof), or
(iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the stockholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 27
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by the
Rights.
(p) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on any series of the outstanding Common Shares payable in
Common Shares (other than a dividend payable in shares of CarMax Stock to the
extent such dividend reduces the Number of Shares Issuable with Respect to the
Inter-Group Interest, as such term is defined in the Articles of Restatement) or
(ii) effect a subdivision, combination or consolidation of any series of the
Common Shares (by reclassification or otherwise than by payment of dividends in
Common Shares) into a greater or lesser number of Common Shares, then in any
such case (i) the number of one four-hundredths of a Series E Preferred Share
(in the case of an event affecting the Circuit City Stock) or a Series F
Preferred Share (in the case of an event affecting the CarMax Stock) purchasable
after such event upon proper exercise of each Right shall be determined by
multiplying the number of one four-hundredths of a Preferred Share so
purchasable immediately prior to such event by a fraction, the numerator of
which is the number of such Common Shares outstanding immediately before such
event and the denominator of which is the number of such Common Shares
outstanding immediately after such event and (ii) each such Common Share
outstanding immediately after such event shall have issued with respect to it
that number of Rights which each such Common Share outstanding immediately prior
to such event had issued with respect to it. The adjustments provided for in
this Section 11(p) shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected. If an event
-23-
<PAGE>
occurs which would require an adjustment under Section 11(a)(ii) and this
Section 11(p), the adjustments provided for in this Section 11(p) shall be in
addition and prior to any adjustment required pursuant to Section 11(a)(ii).
(q) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall redeem the shares of Circuit
City Stock or CarMax Stock in exchange for shares of common stock of one or more
subsidiaries of the Company pursuant to paragraph (B)(5)(b) of Article V, then
there shall be issued with respect to each such share of common stock of a
subsidiary delivered directly to the holders of Circuit City Stock or CarMax
Stock, as applicable, a share purchase right under a shareholder rights plan to
be established by such subsidiary.
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Sections 11 and 13
hereof, the Company shall (a) promptly prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with the transfer agent for the
Common Shares and Preferred Shares a copy of such certificate and (c) mail a
brief summary thereof to each holder of a Rights Certificate in accordance with
Section 25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power. (a) In the event that, following the Share Acquisition
Date, directly or indirectly, (i) the Company shall consolidate with, or merge
with and into, any other Person (other than a subsidiary of the Company in a
transaction which complies with Section 11(o) hereof or any employee benefit
plan of the Company, or any entity holding Common Shares for or pursuant to the
terms of any such plan) and the Company shall not be the continuing or surviving
corporation of such consolidation or merger, (ii) any Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof or any employee benefit plan of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan) shall consolidate with the
Company, or merge with and into the Company, and the Company shall be the
continuing or surviving corporation of such consolidation or merger and, in
connection with such merger, all or part of the outstanding Common Shares shall
be changed into or exchanged for stock or other securities of any other Person
(or the Company) or cash or any other property, or (iii) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one or more transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company
or any of its Subsidiaries in one or more transactions each of which complies
with Section 11(o) hereof), then, and in each such case, proper provision shall
be made so that (A) each holder of a Right (except as otherwise provided in
Section 7(e) hereof) shall thereafter have the right to receive, upon the
exercise thereof at the then current Series E Purchase Price (in the case of a
Circuit City Right) or the then current Series F Purchase Price (in the case of
a CarMax Right), in accordance with the terms of this Agreement, such number of
validly authorized and issued,
-24-
<PAGE>
fully paid, nonassessable and freely tradeable shares of Common Shares of the
Principal Party (as such term is hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall be equal
to the result obtained by (1) multiplying such then current Purchase Price by
the number of one four-hundredths of a Preferred Share for which such Right is
then exercisable (without taking into account any adjustment previously made
pursuant to Section 11(a)(ii)) and (2) dividing that product (which, following
the first occurrence of a Section 13 Event, shall be referred to as the
"Purchase Price" for each such Right and for all purposes of this Agreement) by
50% of the Current Market Price per share of the Common Shares of such Principal
Party on the date of consummation of such Section 13 Event; (B) such Principal
Party shall thereafter be liable for, and shall assume, by virtue of such
Section 13 Event, all the obligations and duties of the Company pursuant to this
Agreement; (C) the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of Section
11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (D) such Principal Party shall take such steps
(including, but not limited to, the reservation of a sufficient number of shares
of its Common Shares in accordance with Section 9) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its Common Shares thereafter deliverable upon the exercise of
the Rights; and (E) the provisions of Section 11(a)(ii) hereof shall be of no
effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in
clause (i) or (ii) of the first sentence of Section 13(a), the Person
that is the issuer of any securities into which Common Shares of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in
clause (iii) of the first sentence of Section 13(a), the Person that is
the party receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions; provided,
however, that in any such case, (1) if the Common Shares of such Person
are not at such time and have not been continuously over the preceding
12-month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the
Common Shares of which is and has been so registered, "Principal Party"
shall refer to such other Person; and (2) in case such Person is a
Subsidiary, directly or indirectly, of more than one Person, the Common
Shares of two or more of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Shares having the greatest aggregate market value.
-25-
<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
-26-
<PAGE>
such date the Rights are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Rights selected by the Board of Directors of the Company. If on
any such date no such market maker is making a market in the Rights the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
four-hundredths of a Preferred Share) upon exercise of the Rights or to
distribute certificates which evidence fractional Preferred Shares (other than
fractions which are integral multiples of one four-hundredths of a Preferred
Share). Fractions of Preferred Shares in integral multiples of one
four-hundredths of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it, provided that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as Beneficial Owners of
the Preferred Shares. In lieu of fractional Preferred Shares the Company shall
pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction of the
current market value of one Preferred Share. For purposes of this Section 14(b),
the current market value of a Preferred Share shall be the closing price of a
Preferred Share (as determined pursuant to the second sentence of Section 11(d))
for the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right.
Section 15. Rights of Action. All rights of action in respect
to this Agreement, excepting the rights of action given to the Rights Agent
under Section 18 hereof, are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered holders
of the Common Shares); and any registered holder of any Rights Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Rights Certificate (or, prior to
the Distribution Date, of the Common Shares), may, on his own behalf and for his
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Rights Certificate in the manner
provided in such Rights Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of, the obligations of any Person subject to this Agreement.
-27-
<PAGE>
Section 16. Agreement of Right Holders. Every holder of a
Right, by accepting the same, consents and agrees with the Company and the
Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6 and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the person in whose name the Rights
Certificate (or, prior to the Distribution Date, the associated Common Shares
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Shares certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a
Shareholder. No holder, as such, of any Rights Certificate shall be entitled to
vote, receive dividends or be deemed for any purpose the holder of the Preferred
Shares or any other securities of the Company which may at any time be issuable
upon the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting shareholders (except as provided in Section 25), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by such Rights Certificate shall have been exercised in accordance
with the provisions hereof.
-28-
<PAGE>
Section 18. Concerning the Rights Agent. The Company agrees to
pay to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the acceptance, exercise and performance of
its duties hereunder. The Company also agrees to indemnify the Rights Agent for,
and to hold it harmless against, any loss, liability, or expense, incurred
without gross negligence, bad faith or willful misconduct on the part of the
Rights Agent, for anything done, suffered or omitted by the Rights Agent in
connection with the acceptance and administration of this Agreement, including
the costs and expenses of defending against any claim of liability in the
premises (including reasonable counsel fees and expenses).
The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement in reliance upon any
Rights Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of its counsel as set
forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent. Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Rights Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates shall not have been
countersigned, a successor Rights Agent may countersign such Rights Certificates
either in the name of the predecessor Rights Agent or in the name of the
successor Rights Agent; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
-29-
<PAGE>
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Rights Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "Current Market Price") be proved or established by the
Company prior to taking, suffering or omitting any action hereunder, such fact
or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the President, any
Executive Vice President, any Senior Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full and complete authorization to the Rights Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own gross negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement, the
Summary of Rights or in the Rights Certificates (except its countersignature
thereof) or be required to verify the same, but all such statements and recitals
are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
or any adjustment in the terms of the Rights (including the manner, method or
amount thereof) provided for in Section 3, 11, 13 or 23, or the ascertaining of
the existence of facts that would
-30-
<PAGE>
require any such change or adjustment (except with respect to the exercise of
Rights evidenced by Rights Certificates after actual notice that such change or
adjustment is required); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Preferred Shares or other securities to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any Preferred Shares or other securities
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the President, any Executive Vice
President, any Senior Vice President, the Secretary or the Treasurer of the
Company, and to apply to such officers for advice or instructions in connection
with its duties, and it shall not be liable for any action taken, suffered or
omitted to be taken in good faith by it under the provisions of this Agreement
in reliance upon instructions of any such officer. At any time the Rights Agent
may apply to the Company for written instructions with respect to any matter
arising in connection with the Rights Agent's duties and obligations arising
under this Agreement. Such application by the Rights Agent for written
instructions from the Company may, at the option of the Rights Agent, set forth
in writing any action proposed to be taken or omitted by the Rights Agent with
respect to its duties or obligations under this Agreement and the date on and/or
after which such action shall be taken and the Rights Agent shall not be liable
for any action taken or omitted in accordance with a proposal included in any
such application on or after the date specified therein (which date shall not be
less than three Business Days after the Company receives such application,
without the Company's consent) unless, prior to taking or initiating such
action, the Rights Agent has received written instructions in response to such
application specifying the action to be taken or omitted.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting
-31-
<PAGE>
from any such act, default, neglect or misconduct, provided reasonable care was
exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days notice in writing mailed to the Company and to the
transfer agent of the Common Shares and Preferred Shares by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
30 days notice in writing, mailed to the Rights Agent or successor Rights Agent,
as the case may be, and to the transfer agent of the Common Shares and Preferred
Shares by registered or certified mail, and to the holders of the Rights
Certificates by first-class mail. If the Rights Agent shall resign or be removed
or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Rights Certificate
(who shall, with such notice, submit his Rights Certificate for inspection by
the Company), then the registered holder of any Rights Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights Agent.
Any successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the United
States or of the States of New York or Virginia (or of any other state of the
United States so long as such corporation is authorized to do business as a
banking institution in the States of New York or Virginia), in good standing,
having a principal office in the States of New York or Virginia, which is
authorized under such laws to exercise corporate trust powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $50 million. After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any
-32-
<PAGE>
such appointment the Company shall file notice thereof in writing with the
predecessor Rights Agent and the transfer agent of the Common Shares and
Preferred Shares, and mail a notice thereof in writing to the registered holders
of the Rights Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of Common Shares following the
Distribution Date and prior to the redemption or expiration of the Rights, the
Company (a) shall, with respect to Common Shares so issued or sold pursuant to
the exercise of stock options or under any employee plan or arrangement (so long
as such options, plan or arrangement were granted or established, as the case
may be, prior to the Distribution Date), or upon the exercise, conversion or
exchange of securities issued by the Company after the date hereof and prior to
the Distribution Date, and (b) may, in any other case, if deemed necessary or
appropriate by the Board of Directors of the Company, issue Rights Certificates
representing the appropriate number of Rights in connection with such issuance
or sale; provided, however, that (i) no such Rights Certificate shall be issued
if, and to the extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences to
the Company or the Persons to whom such Rights Certificate would be issued, and
(ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination. (a) The Board of
Directors of the Company may, at its option, at any time prior to the earlier of
(i) the close of business on the tenth day following the Share Acquisition Date
(or, if the Share Acquisition Date shall have occurred prior to the Record Date,
the close of business on the fifteenth day following the Record Date), or (ii)
the Final Expiration Date, redeem all but not less than all the then outstanding
Rights at a redemption price of $.0025 per Right, as such amount may be
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price") and the Company may, at its
option, pay the Redemption Price either in Common Shares (based on the "Current
Market Price," as defined in Section 11(d)(i) hereof, of the Common Shares at
the time of redemption) or cash; provided, however, if the Board of Directors of
the Company authorizes redemption of the Rights in either of the circumstances
set forth in clauses (i) and (ii) below, then there must be Continuing Directors
then in office and such authorization shall require the concurrence of a
majority of such Continuing Directors: (i) such authorization occurs on or after
the time a Person becomes an Acquiring
-33-
<PAGE>
Person, or (ii) such authorization occurs on or after the date of a change
(resulting from a proxy or consent solicitation) in a majority of the directors
in office at the commencement of such solicitation if any Person who is a
participant in such solicitation has stated (or, if upon the commencement of
such solicitation, a majority of the Board of Directors of the Company has
determined in good faith) that such Person (or any of its Affiliates or
Associates) intends to take, or may consider taking, any action which would
result in such Person becoming an Acquiring Person or which would cause the
occurrence of a Triggering Event.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights (such action being adopted in
the manner required by paragraph (a) above), evidence of which shall have been
filed with the Rights Agent and without any further action and without any
notice, the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price for each Right so held.
Promptly after the action of the Board of Directors ordering the redemption of
the Rights, the Company shall give notice of such redemption to the Rights Agent
and the holders of the then outstanding Rights by mailing such notice to all
such holders at each holder's last address as it appears upon the registry books
of the Rights Agent or, prior to the Distribution Date, on the registry books of
the transfer agent for the Common Shares. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
Section 24. Exchange. (a) With the affirmative vote of a
majority of the Continuing Directors, the Company may at any time after any
Person becomes an Acquiring Person, exchange all or part of the then outstanding
and exercisable Rights for Common Shares at an exchange ratio of one share of
Circuit City Stock per Circuit City Right and one share of CarMax Stock per
CarMax Right, each such ratio being appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(each such exchange ratio being hereinafter referred to as an "Exchange Ratio").
Notwithstanding the foregoing, the Company shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any such Subsidiary, or
any entity holding Common Shares for or pursuant to the terms of any such plan),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of Common Shares representing 50% or more of the total Voting
Rights of all the Common Shares of the Company then outstanding.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of shares of Circuit City
Stock or CarMax Stock, as the case may be, equal to the number of such Rights
held by such holder multiplied by the applicable Exchange Ratio. The Company
shall
-34-
<PAGE>
promptly give public notice of any such exchange; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Common Shares for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights held by each
holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company,
at its option, may substitute (i) Series E Preferred Shares (or equivalent
preferred shares, as such term is defined in Section 11(b) hereof) for shares of
Circuit City Stock exchangeable for Circuit City Rights, at the initial rate of
one four-hundredths of a Series E Preferred Share (or equivalent preferred
share) for each share of Circuit City Stock and (ii) Series F Preferred Shares
(or equivalent preferred shares, as such term is defined in Section 11(b)
hereof) for shares of CarMax Stock exchangeable for CarMax Rights, at the
initial rate of one four-hundredths of a Series F Preferred Share (or equivalent
preferred share) for each share of CarMax Stock, such rates, in the case of
clause (i) or (ii) of this Section 24(c), to be appropriately adjusted to
reflect adjustments in the voting rights of the Preferred Shares pursuant to the
terms thereof, so that the fraction of a Preferred Share delivered in lieu of a
Common Share shall have the same voting rights as such Common Share.
(d) In the event that there shall not be sufficient Common
Shares or Preferred Shares authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
or Preferred Shares for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Rights Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this subsection (e), the current market value of a whole Common
Share shall be the closing price of such Common Share (as determined pursuant to
the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
after the public announcement by the Company that an exchange is to be effected
pursuant to this Section 24.
Section 25. Notice of Certain Events. In case the Company
shall propose (a) to pay any dividend payable in stock of any class or series to
the holders of either series of Preferred Shares or to make any other
distribution to the holders of either series of Preferred Shares (other than a
regular quarterly cash dividend) or (b) to offer to the holders of either
-35-
<PAGE>
series of Preferred Shares rights or warrants to subscribe for or to purchase
any additional such Preferred Shares or shares of stock of any class or series
or any other securities, rights or options, or (c) to effect any
reclassification of either series of Preferred Shares (other than a
reclassification involving only the subdivision of outstanding Preferred Shares
of such series), or (d) to effect any consolidation or merger into or with any
other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), or to effect any sale or other transfer (or
to permit one or more of its Subsidiaries to effect any sale or other transfer),
in one or more transactions, of 50% or more of the assets or earning power of
the Company and its Subsidiaries (taken as a whole) to, any other Person (other
than the Company and/or any of its Subsidiaries in one or more transactions each
of which complies with Section 11(o) hereof), or (e) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, or distribution of rights or warrants,
or the date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take place and the date
of participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (a) or (b) above at least 20 days prior
to the record date for determining holders of the Preferred Shares for purposes
of such action, and in the case of any such other action, at least 20 days prior
to the date of the taking of such proposed action or the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, whichever
shall be the earlier.
In case any Section 11(a)(ii) Event shall occur, then, in any
such case, the Company shall as soon as practicable thereafter give to each
holder of a Rights Certificate, in accordance with Section 26 hereof, a notice
of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) hereof,
and all references in the preceding paragraph to Preferred Shares shall be
deemed thereafter references to Common Shares and/or, if appropriate, other
securities.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Circuit City Stores, Inc.
9950 Mayland Drive
Richmond, VA 23233
Attention: Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to
-36-
<PAGE>
or on the Rights Agent shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Company) as follows:
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
South St. Paul, Minnesota 55075
Attention: Shareowner Services
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 27, the Company may and
the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing Common Shares. From and after the Distribution Date and subject to
the penultimate sentence of this Section 27, the Company may and the Rights
Agent shall, if the Company so directs, supplement or amend this Agreement
without the approval of any holders of Rights Certificates in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
shorten or lengthen any time period hereunder (which lengthening or shortening,
following the first occurrence of an event set forth in clauses (i) and (ii) of
the proviso to Section 23(a) hereof, shall be effective only if there are
Continuing Directors and shall require the concurrence of a majority of such
Continuing Directors), or (iv) to change or supplement the provisions hereunder
in any manner which the Company may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Rights Certificates (other
than an Acquiring Person or an Affiliate or Associate of an Acquiring Person);
provided, this Agreement may not be supplemented or amended to lengthen,
pursuant to clause (iii) of this sentence, (A) a time period relating to when
the Rights may be redeemed at such time as the Rights are not then redeemable,
or (B) any other time period unless such lengthening is for the purpose of
protecting, enhancing or clarifying the rights of, and/or the benefits to, the
holders of Rights (other than any Acquiring Person and its Affiliates and
Associates). Upon the delivery of a certificate from an appropriate officer of
the Company which states that the proposed supplement or amendment is in
compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment. Notwithstanding anything contained in this
Agreement to the contrary, no supplement or amendment shall be made which
changes the Redemption Price, the Final Expiration Date, the Purchase Price or
the number of one four-hundredths of a Preferred Share for which a Right is
exercisable. Prior to the Distribution Date, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Shares (other than an Acquiring Person).
-37-
<PAGE>
Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Determinations and Actions by the Board of
Directors, etc. For all purposes of this Agreement, any calculation of the
number of Common Shares outstanding at any particular time, including for
purposes of determining the number of such outstanding Common Shares of which
any Person is the Beneficial Owner, shall be made in accordance with the last
sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the
Exchange Act. The Board of Directors of the Company (with, where specifically
provided for herein, the consent of a majority of the Continuing Directors)
shall have the exclusive power and authority to administer this Agreement and to
exercise all rights and powers specifically granted to the Board (with, where
specifically provided for herein, the consent of a majority of the Continuing
Directors) or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement) and (iii) make all factual determinations deemed necessary
or advisable for the administration of this Agreement. All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) which are done or
made by the Board in good faith, shall (x) be final, conclusive and binding on
the Company, the Rights Agent, the holders of the Rights and all other parties,
and (y) not subject the Board to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Rights Agent and the registered holders of the Rights Certificates
(and, prior to the Distribution Date, the Common Shares) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement, or any portion thereof, is held by a court of
competent jurisdiction or other authority to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement, including any portions of any thereof which are not held to be
invalid, void or unenforceable, shall remain in full force and effect and shall
in no way be affected, impaired or invalidated; provided, however, that
notwithstanding anything in this Agreement to the contrary, if any such term,
provision, covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board of Directors of the Company, with
the consent of a majority of the Continuing Directors after the Distribution
Date, determines in its good faith business judgment that severing the invalid
language from
-38-
<PAGE>
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_________________________ By__________________________
Title______________________ Title_______________________
NORWEST BANK MINNESOTA, N.A.
Attest:
By________________________ By__________________________
Title_____________________ Title_______________________
-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-2-3
<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-2-4
<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 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-2-5
<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-2-6
<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 5.2
January 30, 1997
Circuit City Stores, Inc.
9950 Mayland Drive
Richmond, Virginia 23233
Circuit City Stores, Inc.
Registration Statement on Form S-3
Circuit City Stock and Circuit City Rights
Ladies and Gentlemen:
We have acted as your counsel in connection with the Registration
Statement on Form S-3 (No. 333-15995) (the "Registration Statement") filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "1933 Act"), relating to the offer and sale of (i) up to 21,689,000
shares of Circuit City Stores, Inc. -- CarMax Group Common Stock, par value $.50
per share (the "CarMax Stock"), of Circuit City Stores, Inc. (the "Company") and
(ii) an equal number of Circuit City Stores, Inc. -- CarMax Group Rights to
purchase shares of the Company's Series F Preferred Stock (the "CarMax Rights")
to be issued pursuant to the Restated Rights Agreement and initially attached to
the CarMax Stock. The Registration Statement also registers the following
securities which are or may be issuable upon conversion of the CarMax Stock by
the Company: (x) shares of Circuit City Stores, Inc. -- Circuit City Group
Common Stock, par value $.50 per share (the "Circuit City Stock"), of the
Company and (y) an equal number of Circuit City Stores, Inc. -- Circuit City
Group Rights to purchase shares of the Company's Series E Preferred Stock (the
"Circuit City Rights") which may be issuable pursuant to the Restated Rights
Agreement and initially attached to the Circuit City Stock. Defined terms not
otherwise defined herein have the meaning ascribed to them in the Registration
Statement.
We have previously issued our opinion dated June 16, 1988 (the "1988
Opinion") and addressed to the Board of Directors of the Company (the "Board")
relating to the Original Rights, each of which is to be redesignated as a
Circuit City Right as described in the Registration Statement. The 1988 Opinion
is filed as part of our opinion at Exhibit 5 to the Company's Registration
Statement No. 33-64757 on Form S-8, which registration statement became
effective December 5, 1995. In addition, we have issued our opinion dated
January 14, 1997 (the "1997 Opinion") and addressed to the Board relating to the
Circuit City Rights and the CarMax Rights, a copy of which is attached to our
opinion dated January 14, 1997 addressed to the Company and filed as Exhibit 5.1
to the Registration Statement. Our opinions contained herein relating to the
Circuit City Rights are subject to all of the assumptions and qualifications
contained in the 1988 Opinion, as if such opinion related to the Circuit City
Rights, and the 1997 Opinion.
<PAGE>
Circuit City Stores, Inc.
January 30, 1997
Page 2
We have participated in the preparation of the Registration Statement
and have examined the corporate records and documents, statements and
certificates of officers of the Company and such other materials as we have
deemed necessary to the issuance of this opinion. We assume for purposes of this
opinion that prior to the issuance of the Circuit City Stock and the Circuit
City Rights upon a conversion of the CarMax Stock (a) Articles of
Amendment setting forth both the CarMax Stock Proposal Amendments and the
amendments to the Company's Amended and Restated Articles of Incorporation in
the form included as exhibits to the Restated Rights Agreement are filed with,
and declared effective by, the Virginia State Corporation Commission, (b) the
Restated Rights Agreement is duly executed and delivered by the Company and the
rights agent and (c) the Company takes all actions necessary to authorize such
conversion (and the issuance of the Circuit City Stock in connection therewith)
in accordance with the terms of the Amended Articles. We also assume for
purposes of this opinion that at the time of such conversion, the Company has a
sufficient number of authorized but unissued shares of Circuit City Stock and,
if Circuit City Rights are issuable in connection therewith, Series E Preferred
Stock to effect such conversion. Based on the foregoing, we are of the opinion
that:
1. The Circuit City Stock has been duly authorized, and, when issued
upon conversion of the CarMax Stock in accordance with the Amended Articles,
will be validly issued, fully paid and nonassessable.
2. All corporate actions required under the laws of the Commonwealth of
Virginia have been taken for the Circuit City Rights, if and when issued
pursuant to the Restated Rights Agreement upon conversion of the CarMax Stock in
accordance with the Amended Articles, to be validly issued.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the statement made in reference to our firm under
the caption "Legal Matters" in the related Prospectus and in any amendment or
supplement to the Prospectus. We do not admit by giving this consent that we are
in the category of persons whose consent is required under Section 7 of the 1933
Act, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ McGuire, Woods, Battle & Boothe, L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Circuit City Stores, Inc.:
We consent to the use of our reports included herein and to the references
to our firm under the headings "CarMax Group Selected Historical Financial
Data," "Company Selected Historical Financial Data" and "Experts" in the
prospectus.
/S/ KPMG PEAT MARWICK LLP
Richmond, Virginia
January 30, 1997
