CIRCUIT CITY STORES INC, 10-Q, 1997-10-15

CIRCUIT CITY STORES INC
10-Q, 1997-10-15
RADIO, TV & CONSUMER ELECTRONICS STORES

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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1997

Commission File Number 1-5767

CIRCUIT CITY STORES, INC.
(Exact Name of Registrant as Specified in its Charter)

VIRGINIA 54-0493875
(State of Incorporation) (I.R.S. Employer
Identification No.)

9950 MAYLAND DRIVE, RICHMOND, VIRGINIA 23233
(Address of Principal Executive Offices and Zip Code)

(804) 527-4000
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.

<TABLE>
<S> <C>
Class Outstanding at September 30,1997
Circuit City Stores, Inc. - Circuit City Group Common Stock, par value $0.50 98,710,943
Circuit City Stores, Inc. - CarMax Group Common Stock, par value $0.50 22,140,135

An Index is included on Page 2 and a separate Index for Exhibits is included on
Page 31.
</TABLE>

<PAGE>

CIRCUIT CITY STORES, INC. AND SUBSIDIARIES

INDEX
<TABLE>
<S> <C>
Page
No.
PART I. FINANCIAL INFORMATION
---------------------

Item 1. Financial Statements
--------------------

Consolidated Financial Statements:
---------------------------------
Consolidated Balance Sheets -
August 31, 1997 and February 28, 1997 4

Consolidated Statements of Earnings -
Three Months and Six Months Ended August 31, 1997 and 1996 5

Consolidated Statements of Cash Flows -
Six Months Ended August 31, 1997 and 1996 6

Notes to Consolidated Financial Statements 7

Circuit City Group Financial Statements:
---------------------------------------
Circuit City Group Balance Sheets -
August 31, 1997 and February 28, 1997 13

Circuit City Group Statements of Earnings -
Three Months and Six Months Ended August 31, 1997 and 1996 14

Circuit City Group Statements of Cash Flows -
Six Months Ended August 31, 1997 and 1996 15

Notes to Circuit City Group Financial Statements 16

CarMax Group Financial Statements:
---------------------------------
CarMax Group Balance Sheets -
August 31, 1997 and February 28, 1997 22

CarMax Group Statements of Operations -
Three Months and Six Months Ended August 31, 1997 and 1996 23

CarMax Group Statements of Cash Flows -
Six Months Ended August 31, 1997 and 1996 24

Notes to CarMax Group Financial Statements 25

Item 2. Management's Discussion and Analysis:
------------------------------------

Circuit City Stores, Inc. Management's Discussion and
Analysis of Financial Condition and Results of Operations 9

Circuit City Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 18

CarMax Group Management's Discussion and Analysis
of Financial Condition and Results of Operations 27

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<PAGE>

PART II. OTHER INFORMATION
-----------------
Item 5. Other Information 30

Item 6. Exhibits and Reports on Form 8-K 31

</TABLE>

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<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
------------------------------------------
Consolidated Balance Sheets
---------------------------
(Amounts in thousands except share data)
<TABLE>
<S> <C>
Aug. 31, 1997 Feb. 28, 1997
------------- -------------
(Unaudited)

ASSETS
- ------
Current assets:
Cash and cash equivalents $ 168,770 $ 202,643
Net accounts and notes receivable 567,363 531,974
Inventory 1,421,868 1,392,363
Deferred income taxes 4,685 21,340
Prepaid expenses and other current assets 31,334 14,813
-------------- -------------

Total current assets 2,194,020 2,163,133

Property and equipment, net 947,183 886,091
Other assets 24,067 31,949
-------------- -------------

TOTAL ASSETS $ 3,165,270 $ 3,081,173
============== =============

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 1,361 $ 1,490
Accounts payable 787,180 720,754
Short-term debt 8,211 347
Accrued expenses and other current liabilities 107,725 105,500
Accrued income taxes 14,766 8,560
-------------- -------------

Total current liabilities 919,243 836,651

Long-term debt, excluding current installments 425,579 430,290
Deferred revenue and other liabilities 143,780 166,295
Deferred income taxes 22,387 33,081
-------------- -------------

TOTAL LIABILITIES 1,510,989 1,466,317
-------------- -------------

Stockholders' equity:

Circuit City Group common stock, $0.50 par value;
175,000,000 shares authorized; 98,652,000 shares
issued and outstanding as of August 31, 1997 49,326 49,089
CarMax Group common stock, $0.50 par value;
175,000,000 shares authorized; 21,976,000 shares
issued and outstanding as of August 31, 1997 10,988 10,930
Capital in excess of par value 512,873 506,823
Retained earnings 1,081,094 1,048,014
-------------- -------------

TOTAL STOCKHOLDERS' EQUITY 1,654,281 1,614,856
-------------- -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,165,270 $ 3,081,173

============== =============
</TABLE>
See accompanying notes to consolidated financial statements.

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<PAGE>

CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
------------------------------------------
Consolidated Statements of Earnings (Unaudited)
-----------------------------------
(Amounts in thousands except per share data)

<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
1997 1996 1997 1996
-------------- ------------- ------------- --------------

Net sales and operating revenues $ 2,020,572 $ 1,767,043 $ 3,877,476 $ 3,382,309

Cost of sales, buying and warehousing 1,548,143 1,370,715 2,986,769 2,623,711
-------------- ------------- ------------- --------------

Gross profit 472,429 396,328 890,707 758,598
-------------- ------------- ------------- --------------

Selling, general and administrative expenses 422,472 340,871 814,340 669,386

Interest expense 5,624 4,557 11,915 11,226
-------------- ------------- ------------- --------------

Total expenses 428,096 345,428 826,255 680,612
-------------- ------------- ------------- --------------

Earnings before income taxes 44,333 50,900 64,452 77,986

Provision for income taxes 16,847 19,317 24,492 29,620
-------------- ------------- ------------- --------------

Net earnings $ 27,486 $ 31,583 $ 39,960 $ 48,366
============== ============= ============= ==============

Net earnings (loss) attributable to:

Circuit City Group common stock $ 27,879 $ 31,583 $ 40,628 $ 48,366
============= ==============
CarMax Group common stock (393) (668)
-------------- -------------

$ 27,486 $ 39,960
============== =============

Weighted average common shares and common share equivalents:

Circuit City Group common stock 99,912 99,403 99,867 99,292
============== ============= ============= ==============
CarMax Group common stock 21,915 21,893
============== =============

Net earnings (loss) per share:

Circuit City Group common stock $ 0.28 $ 0.32 $ 0.41 $ 0.49
============== ============= ============= ==============
CarMax Group common stock $ (0.02) $ (0.03)
============== =============

Dividends paid per common share:

Circuit City Group common stock $ 0.035 $ 0.035 $ 0.070 $ 0.065
============== ============= ============= ==============
CarMax Group common stock $ - $ -
============== =============

</TABLE>

See accompanying notes to consolidated financial statements.

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<PAGE>

CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
------------------------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------
(Amounts in thousands)

<TABLE>
<S> <C>
Six Months Ended
August 31,
1997 1996
-------------- -------------
Operating Activities:
- ---------------------
Net earnings $ 39,960 $ 48,366
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 61,894 48,797
Loss (gain) on sales of property and equipment 450 (2,088)
Provision for deferred income taxes 5,961 17,759
Decrease in deferred revenue and other liabilities (22,515) (29,947)
Increase in net accounts and notes receivable (35,389) (97,394)
Increase in inventory, prepaid expenses
and other current assets (46,026) (76,902)
Decrease (increase) in other assets 7,882 (1,801)
Increase in accounts payable, accrued expenses
and other current liabilities, and accrued income taxes 74,857 69,209
-------------- -------------
Net cash provided by (used in) operating activities 87,074 (24,001)
-------------- -------------

Investing Activities:
- ---------------------
Purchases of property and equipment (284,848) (227,182)
Proceeds from sales of property and equipment 161,412 126,041
-------------- -------------
Net cash used in investing activities (123,436) (101,141)
-------------- -------------

Financing Activities:
- ---------------------
Proceeds from issuance of short-term debt, net 7,864 83,374
Proceeds from issuance of long-term debt - 31,311
Principal payments on long-term debt (4,840) (945)
Proceeds from issuance of common stock, net 6,345 8,266
Dividends paid on Circuit City Group common stock (6,880) (6,344)
-------------- -------------
Net cash provided by financing activities 2,489 115,662
-------------- -------------

Decrease in cash and cash equivalents (33,873) (9,480)
Cash and cash equivalents at beginning of year 202,643 43,704
-------------- -------------
Cash and cash equivalents at end of period $ 168,770 $ 34,224
============== =============

</TABLE>
See accompanying notes to consolidated financial statements.

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<PAGE>

CIRCUIT CITY STORES, INC. AND SUBSIDIARIES
------------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)

1. Basis of Presentation
---------------------

On January 24, 1997, Circuit City Stores, Inc. (the "Company") shareholders
approved the creation of two common stock series. The Company's existing
common stock was subsequently redesignated as Circuit City Stores, Inc. -
Circuit City Group Common Stock. In an initial public offering, which was
completed February 7, 1997, the Company sold 21.86 million shares of
Circuit City Stores, Inc. - CarMax Group Common Stock.

The Circuit City Group Common Stock is intended to track separately the
performance of the Circuit City store-related operations, a retained
interest in the CarMax Group, and all other businesses in which the Company
may be engaged (other than those comprising the CarMax Group). The CarMax
Group Common Stock is intended to track separately the performance of the
CarMax operations.

Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the
CarMax Group and the Circuit City Group for the purposes of preparing their
respective financial statements, holders of CarMax Group Stock and holders
of Circuit City Group Stock are shareholders of the Company and subject to
all of the risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Such attribution and the change in
the equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its
subsidiaries. The results of operations or financial condition of one Group
could affect the results of operations or financial condition of the other
Group. Accordingly, the consolidated financial statements included herein
should be read in conjunction with the financial statements of each group
and with the notes to consolidated and group financial statements included
in the Company's 1997 annual report to shareholders.

2. Accounting Policies
-------------------

The consolidated financial statements of 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.

Derivative Financial Instruments

The Company enters into interest rate swap agreements to manage exposure to
interest rates and to more closely match funding costs to the use of the
funding.

Interest rate swaps relating to long-term debt are classified as held for
purposes other than trading and are accounted for on a settlement basis. In
order to qualify for this accounting treatment, the swap must synthetically
alter the nature of a designated underlying financial instrument. Under
this method, payments or receipts due or owed under the swap agreement are
accrued through each settlement date and recorded as a component of
interest expense. If a swap designated as a synthetic alteration were to be
terminated, any gain or loss on the termination would be deferred and
recognized over the shorter of the original contractual life of the swap or
the related life of the designated long-term debt.

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<PAGE>

The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller in an
exchange for a financial asset are considered part of the proceeds and
recorded at fair value as a component of earnings. If such a swap were
terminated, the impact on the fair value of the financial asset created by
the sale of the related receivables would be estimated and included in
earnings.

3. Earnings Per Share
------------------

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will
be determined. Adoption of this statement by the Company will not have a
material impact on earnings per share.

4. Interest Rate Swaps
-------------------

On behalf of the Circuit City Group, the Company entered into five-year
interest rate swaps in October 1994, with notional amounts totaling $300
million related to the credit card bank subsidiary. These swaps were
entered into as part of the sale of receivables and are therefore included
in the gain on the sale of receivables.

Concurrent with the funding of the $175 million term loan in May 1995, the
Company entered into five-year interest rate swaps with notional amounts
aggregating $175 million. Recording the swaps at fair value would result in
a loss of $0.3 million at August 31, 1997, compared with a gain of $0.1
million at February 28, 1997.

On behalf of the CarMax Group, the Company, during the quarter, entered
into a 40-month amortizing swap with a notional amount of approximately $35
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was approximately $163 million at
August 31, 1997, and $114 million at February 28, 1997. These swaps were
entered into as part of the sale of receivables and are therefore included
in the gain on the sale of receivables.

5. Subsequent Event
----------------

In September 1997, the Company announced that between the second quarter of
this fiscal year and the first quarter of next year, it will invest an
additional $100 million in Digital Video Express, LP ("Divx"), a
partnership that has developed and will market a new home digital video
system. The Company holds the majority ownership in the partnership. The
Divx investment is allocated to the Circuit City Group and reduced net
earnings by $2.8 million in the second quarter of this year compared with
$1.6 million last year. For the six months ended August 31, 1997, the Divx
investment reduced net earnings by $5.4 million compared with $3.4 million
for the same period last year.

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<PAGE>

ITEM 2.

CIRCUIT CITY STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------

Net Sales and Operating Revenues and General Comments
- -----------------------------------------------------

Sales for the second quarter of fiscal 1998 were $2.02 billion, an increase of
14 percent from $1.77 billion in the same period last year. Sales for the first
half of the fiscal year were $3.88 billion, an increase of 15 percent from $3.38
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 and CarMax comparable store sales (decreases) increases for the
second quarter and first six months of fiscal years 1998 and 1997 were as
follows:
<TABLE>
<S> <C>

FY `98 2nd Quarter Six Months
----------------------------------------- --------------------------- ---------------------------

JUN JUL AUG FY '98 FY `97 FY '98 FY '97
------------- ------------- ------------- ------------- ------------- ------------- -------------
Circuit City Group (6%) (5%) 4% (2%) (7%) (2%) (6%)
- ----------------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
CarMax Group 6% 10% 11% 9% 26% 11% 21%
- ----------------------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
</TABLE>

Second quarter Circuit City comparable store sales reflect weakening in the
personal computer and consumer electronics categories early in the quarter,
followed by significantly stronger sales during the final month. Comparable
store sales reflect industry trends; management expects that Circuit City sales
will remain soft as long as industry weakness continues. CarMax comparable store
sales increase for the second quarter reflects continued strong sales
performance for the existing store base.

During the quarter, Circuit City opened four stores in the New York City
metropolitan market; three stores in Dayton, Ohio; one store each in Detroit,
Mich., Medford, Ore., and Wilkes-Barre, Penn.; replaced or expanded two stores
in existing markets and opened two mall-based Circuit City Express locations.
Circuit City plans to have opened approximately 60 Superstores and replaced
approximately 15 existing stores by fiscal year-end.

At the end of the quarter, CarMax became the first used-car Superstore
specialist operating in one of the nation's top five markets when it entered
Washington/Baltimore with its largest Superstore to date. In June, CarMax opened
its third Atlanta, Ga., location, which sells used cars and new cars under an
agreement with Chrysler Corporation. In July, two CarMax locations were opened
in Houston, Texas. During September, CarMax opened two Superstores, including
its first stores in the Dallas/Ft. Worth market and in West Palm Beach, Florida.
CarMax plans to have opened approximately 10 locations by the end of fiscal
1998.

For the Circuit City Group, gross dollar sales from all extended warranty
programs were 5.7 percent of sales in the second quarter of fiscal 1998 and 6.2
percent in the second quarter of fiscal 1997. Third-party warranty revenue was
3.7 percent of sales in the second quarter of both fiscal 1998 and fiscal 1997.
The total extended warranty revenue that is reported in total sales was 4.9
percent of sales in this year's second quarter versus 5.5 percent in the second
quarter of last year.

For the CarMax Group, gross dollar sales from all extended warranty programs
were 3.5 percent of sales in this year's second quarter and 3.4 percent in the
same period last year. Third-party warranty revenue rose to 1.2 percent of sales
in this year's second quarter from 0.9 percent in the same period last year. The
total extended warranty revenue that is reported in total sales was 1.3 percent
of sales in this year's second quarter versus 0.7 percent in the second quarter
of last year.

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<PAGE>

The Company's operations, in common with other retailers in general, are subject
to seasonal influences. Historically, the Circuit City Group 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. CarMax stores, however,
have experienced more of their net sales in the first two quarters of the fiscal
year. 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 increased to 23.4 percent of sales in the second quarter
of fiscal 1998 from 22.4 percent of sales in the same period last year. For the
six months ended August 31, 1997, the gross profit margin increased to 23.0
percent of sales from 22.4 percent of sales in the first half of fiscal 1997.

The consolidated gross profit margin increase reflects strong inventory
management and a more profitable merchandise mix for both the Circuit City and
CarMax Groups. Management expects that the competitive climate in the
electronics business, changes in the Circuit City merchandise mix, and the
increased sales volume from CarMax will continue to affect gross margins.

Selling, General and Administrative Expenses
- --------------------------------------------

The Company's selling, general and administrative expense ratio increased from
19.3 percent of sales in the second quarter of last year to 20.9 percent for the
same period this year. For the six-month period ended August 31, 1997, the
expense ratio was 21.0 percent of sales compared with 19.8 percent in the same
period last year.

The higher ratio primarily reflects the impact of lower Circuit City comparable
store sales; a lower earnings contribution from the credit card bank subsidiary;
CarMax expansion and corporate overhead costs; and a second quarter impact from
the Divx investment of approximately 22 basis points versus 14 basis points last
year.

Interest Expense
- ----------------

Interest expense for the second quarter of fiscal 1998 increased to 0.3 percent
of sales from 0.2 percent in last year's second quarter. Interest expense was
0.3 percent of sales for both the six-month periods ended August 31, 1997 and
1996.

Income Taxes
- ------------

The effective income tax rate was 38.0 percent in the second quarter and first
six months of both fiscal 1998 and fiscal 1997.

Net Earnings
- ------------

Net earnings for the quarter ended August 31, 1997, decreased 13 percent to
$27.5 million from $31.6 million in the same period last year. Net earnings
decreased 17 percent to $40.0 million for the six-month period ended August 31,
1997, from $48.4 million in the same period last year.

For the second quarter, the investment in Divx reduced Circuit City Group net
earnings by $2.8 million this year compared with $1.6 million last year. The
Divx investment reduced Circuit City Group net earnings by $5.4 million for the
first six months of fiscal 1998 compared with $3.4 million for the same period
last year.

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<PAGE>

Liquidity and Capital Resources
- -------------------------------

Total assets at August 31, 1997, were $3,165.3 million, up $84.1 million or 3
percent since February 28, 1997. The largest contributor to the asset increase
was the $35.4 million growth in net accounts and notes receivable, primarily due
to a decrease in the rate of securitization of credit card accounts. Inventory
increased $29.5 million to support planned and completed store openings for the
CarMax Group.

To support new store openings for the Circuit City and CarMax Groups, accounts
payable increased $66.4 million from the end of fiscal 1997.

The Company's credit card bank subsidiary, included in the Circuit City Group,
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. The master trust vehicle permits further expansion of the securitization
program to meet future needs. As of August 31, 1997, the master trust program
had a total program capacity of $1.18 billion. As of August 31, 1997, the
Company's credit card bank subsidiary had an additional asset securitization
program allowing the transfer of up to $1.56 billion in receivables related to
its other bank card programs. As of August 31, 1997, the Company also had an
asset securitization program operated through a special purpose subsidiary on
behalf of the CarMax Group that allowed the transfer of up to $225 million in
auto loan receivables. The Company anticipates that it will be able to expand
its securitization programs to meet future needs.

Between the second quarter of this fiscal year and the first quarter of next
fiscal year, the Company plans to invest an additional $100 million in Digital
Video Express, LP, a partnership that has developed and will market a new home
digital video system that has won support from four leading U.S. movie studios
and three brand-name consumer electronics manufacturers. The Company holds the
majority ownership in the partnership. The remaining interest is held by the Los
Angeles entertainment law firm Ziffren, Brittenham, Branca & Fischer. The
investment in Divx is allocated to the Circuit City Group. The Company expects
that its investment will reduce Circuit City Group net earnings per share for
the full fiscal year by approximately 27 cents, including 3 cents recorded in
the first quarter, 3 cents for the second quarter, 7 cents for the third quarter
and another 14 cents in the fourth quarter. The remainder of the investment is
expected to reduce net earnings per share in next fiscal year's first quarter by
approximately 14 cents. (For further information about Divx see Part II., Item
5.)

The Company generally expects to continue its existing long-term capitalization
strategy for the balance of the current fiscal year. 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 equity offering and that securitization transactions will be used to
finance the growth in credit card and auto loan receivables. At August 31, 1997,
the Company maintained $410 million in seasonal lines that are renewed annually
with various banks as well as a $150 million revolving credit facility.

Forward-Looking Statements
- --------------------------

This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of new concepts.

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<PAGE>

maintaining licensing and manufacturing agreements, competition from substitute
products and services, rapid technological change, dependence on key personnel,
development or assertions by or against the Company relating to intellectual
property rights, and the uncertainty of availability of additional financing.

Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the Company's 1997 SEC filings, including the Company's report
on Form 10-K for the year ended February 28, 1997.

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<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
----------------------------------------------
Balance Sheets
--------------
(Amounts in thousands)
<TABLE>
<S> <C>
Aug. 31, 1997 Feb. 28, 1997
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 38,724 $ 32,222
Net accounts and notes receivable 521,446 503,624
Inter-group note receivable 123,911 -
Merchandise inventory 1,293,110 1,310,103
Deferred income taxes 8,293 23,764
Prepaid expenses and other current assets 23,806 10,711
-------------- -------------

Total current assets 2,009,290 1,880,424

Property and equipment, net 784,410 793,917
Inter-Group Interest in the CarMax Group 300,968 303,657
Other assets 22,416 30,258
-------------- -------------

TOTAL ASSETS $ 3,117,084 $ 3,008,256
============== =============

LIABILITIES AND GROUP EQUITY
- ----------------------------
Current liabilities:
Current installments of long-term debt $ 1,361 $ 1,490
Accounts payable 733,669 692,461
Short-term debt 8,211 347
Inter-group payable 98,006 48,147
Accrued expenses and other current liabilities 104,565 103,441
Accrued income taxes 14,766 8,560
-------------- -------------

Total current liabilities 960,578 854,446

Long-term debt, excluding current installments 425,579 430,290
Deferred revenue and other liabilities 140,671 163,700
Deferred income taxes 23,855 33,123
-------------- -------------

TOTAL LIABILITIES 1,550,683 1,481,559

GROUP EQUITY 1,566,401 1,526,697
-------------- -------------

TOTAL LIABILITIES AND GROUP EQUITY $ 3,117,084 $ 3,008,256
============== =============
</TABLE>

See accompanying notes to group financial statements.

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<PAGE>

CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
----------------------------------------------
Statements of Earnings (Unaudited)
----------------------
(Amounts in thousands except per share data)

<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
1997 1996 1997 1996
-------------- ------------- ------------- --------------

Net sales and operating revenues $ 1,814,139 $ 1,634,827 $ 3,493,489 $ 3,125,399

Cost of sales, buying and warehousing 1,360,580 1,249,446 2,638,281 2,389,867
-------------- ------------- ------------- -------------

Gross profit 453,559 385,381 855,208 735,532
-------------- ------------- ------------- -------------

Selling, general and administrative expenses 401,049 329,286 774,749 647,552

Interest expense 5,325 3,402 11,150 8,951
-------------- ------------- ------------- -------------

Total expenses 406,374 332,688 785,899 656,503
-------------- ------------- ------------- -------------

Earnings before income taxes and
Inter-Group Interest in the CarMax Group 47,185 52,693 69,309 79,029

Provision for income taxes 17,959 20,062 26,386 30,053
-------------- ------------- ------------- -------------

Earnings before Inter-Group Interest
in the CarMax Group 29,226 32,631 42,923 48,976

Net loss related to Inter-Group
Interest in the CarMax Group 1,347 1,048 2,295 610
-------------- ------------- ------------- -------------

Net earnings $ 27,879 $ 31,583 $ 40,628 $ 48,366
============== ============= ============= =============

Weighted average common shares
and common share equivalents 99,912 99,403 99,867 99,292
============== ============= ============= =============

Net earnings per share $ 0.28 $ 0.32 $ 0.41 $ 0.49
============== ============= ============= ==============

Dividends paid per common share $ 0.035 $ 0.035 $ 0.070 $ 0.065
============== ============= ============= ==============

</TABLE>

See accompanying notes to group financial statements.

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<PAGE>

CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
----------------------------------------------
Statements of Cash Flows (Unaudited)
------------------------
(Amounts in thousands)
<TABLE>
<S> <C>
Six Months Ended
August 31,
1997 1996
-------------- ---------------
Operating Activities:
Net earnings $ 40,628 $ 48,366
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Net loss related to Inter-Group Interest
in the CarMax Group 2,295 610
Depreciation and amortization 59,992 47,940
Loss (gain) on sales of property and equipment 450 (2,088)
Provision for deferred income taxes 6,203 16,980
Decrease in deferred revenue and other liabilities (23,029) (30,567)
Increase in net accounts and notes receivable (17,822) (88,288)
Decrease (increase) in merchandise inventory, prepaid
expenses and other current assets 3,898 (79,005)
Decrease (increase) in other assets 7,842 (116)
Increase in accounts payable, accrued expenses
and other current liabilities, and accrued income taxes 48,538 64,111
-------------- -------------
Net cash provided by (used in) operating activities 128,995 (22,057)
-------------- -------------

Investing Activities:
Purchases of property and equipment (171,245) (201,361)
Proceeds from sales of property and equipment 120,310 122,334
Issuance of inter-group note receivable, net (123,911) -
-------------- -------------
Net cash used in investing activities (174,846) (79,027)
-------------- -------------

Financing Activities:
Increase in inter-group payable, net 49,859 -
Proceeds from issuance of short-term debt, net 7,864 65,470
(Principal payments on) proceeds from issuance of long-term debt, net (4,840) 20,575
Equity issuances, net 6,350 8,266
Dividends paid (6,880) (6,344)
-------------- -------------
Net cash provided by financing activities 52,353 87,967
-------------- -------------

Increase (decrease) in cash and cash equivalents 6,502 (13,117)
Cash and cash equivalents at beginning of year 32,222 41,485
-------------- -------------
Cash and cash equivalents at end of period $ 38,724 $ 28,368
============== =============

</TABLE>

See accompanying notes to group financial statements.

15 of 32

<PAGE>

CIRCUIT CITY STORES, INC. - CIRCUIT CITY GROUP
----------------------------------------------
Notes to Group Financial Statements
-----------------------------------
(Unaudited)

1. Basis of Presentation
---------------------

On January 24, 1997, Circuit City Stores, Inc. shareholders approved the
creation of two common stock series. The Company's existing common stock
was subsequently redesignated as Circuit City Stores, Inc. - Circuit City
Group Common Stock. In an initial public offering, which was completed
February 7, 1997, the Company sold 21.86 million shares of Circuit City
Stores, Inc. - CarMax Group Common Stock.

Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the
CarMax Group and the Circuit City Group for the purposes of preparing their
respective financial statements, holders of CarMax Group Stock and holders
of Circuit City Group Stock are shareholders of the Company and subject to
all of the risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Such attribution and the change in
the equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its
subsidiaries. The results of operations or financial condition of one Group
could affect the results of operations or financial condition of the other
Group. Accordingly, the Circuit City Group financial statements included
herein should be read in conjunction with the consolidated and CarMax Group
financial statements and with the notes to the consolidated and group
financial statements included in the Company's 1997 annual report to
shareholders.

2. Accounting Policies
-------------------

The Circuit City Group has accounted for its interest in the CarMax Group
in a manner similar to the equity method of accounting. Generally accepted
accounting principles require that the CarMax Group be consolidated with
the Circuit City Group. Except for the effects of not consolidating the
Circuit City Group and the CarMax Group, the financial statements of the
Circuit City Group 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 group
financial statements have been included. The fiscal year-end balance sheet
data was derived from audited financial statements.

Derivative Financial Instruments

The Company enters into interest rate swap agreements to manage exposure to
interest rates and to more closely match funding costs to the use of the
funding.

16 of 32
<PAGE>
The Company also enters into interest rate swap agreements as part of its
asset securitization programs. Swaps entered into by a seller in an
exchange for a financial asset are considered part of the proceeds and
recorded at fair value as a component of earnings. If such a swap were
terminated, the impact on the fair value of the financial asset created by
the sale of the related receivables would be estimated and included in
earnings.

3. Earnings Per Share
------------------

4. Inter-Group Note Receivable
---------------------------

During the first quarter, the Circuit City Group entered into an
inter-group note with the CarMax Group to finance CarMax inventory
purchases until a permanent inventory financing vehicle is established. The
note is payable upon demand and bears interest at the Company's average
borrowing rate. The balance as of August 31, 1997, was $123.9 million and
is included with current assets on the balance sheet.

5. Interest Rate Swaps
-------------------

6. Subsequent Event
----------------

17 of 32

<PAGE>

ITEM 2.

CIRCUIT CITY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
----------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------

Net Sales and Operating Revenues and General Comments
- -----------------------------------------------------

Sales for the second quarter of fiscal 1998 were $1.81 billion, an increase of
11 percent from $1.63 billion in the same period last year. Sales for the first
half of fiscal 1998 were $3.49 billion, an increase of 12 percent from $3.13
billion in the same period last year. The total sales increase reflects the
continued geographic growth of Circuit City Superstores, partly offset by a 2
percent comparable store sales decrease.

Circuit City comparable store sales (decreases) increases for the second quarter
and first six months of fiscal years 1998 and 1997 were as follows:
<TABLE>
<S> <C>
--------------------------------- --------------------------- ----------------------------
FY `98 2nd Quarter Six Months
--------------------------------- --------------------------- ----------------------------

JUN JUL AUG FY '98 FY `97 FY '98 FY '97
----------- ----------- --------- ------------ -------------- ------------- -------------
(6%) (5%) 4% (2%) (7%) (2%) (6%)
----------- ----------- --------- ------------ -------------- ------------- -------------
</TABLE>

During the quarter, Circuit City opened four stores in the New York metropolitan
market; three stores in Dayton, Ohio; one store each in Detroit, Mich., Medford,
Ore., and Wilkes-Barre, Penn.; replaced or expanded two stores in existing
markets and opened two mall-based Circuit City Express locations. Circuit City
plans to have opened approximately 60 Superstores and replaced approximately 15
existing stores by fiscal year end.

The table below details Circuit City retail units:
<TABLE>
<S> <C>
-----------------------------------------------------------------------------------------------------------------
Stores Open At End of Quarter Estimate
---------------------------------------------
Aug. 31, 1997 Aug. 31, 1996 Feb. 28, 1998 Feb. 28, 1997
-----------------------------------------------------------------------------------------------------------------
Superstore
-----------------------------------------------------------------------------------------------------------------
"D" Superstore 103 76 115 95
-----------------------------------------------------------------------------------------------------------------
"C" Superstore 278 258 288 278
-----------------------------------------------------------------------------------------------------------------
"B" Superstore 59 47 75 54
-----------------------------------------------------------------------------------------------------------------
"A" Superstore 20 12 25 16
-----------------------------------------------------------------------------------------------------------------
Electronics-Only 4 5 4 5
-----------------------------------------------------------------------------------------------------------------
Circuit City Express 52 41 52 45
=================================================================================================================
TOTAL 516 439 559 493
=================================================================================================================
</TABLE>

18 of 32
<PAGE>

The percentage of merchandise sales by category is listed below:
<TABLE>
<S> <C>
-------------------------------------------------------------------------------------------------
2nd Quarter Six Months
Fiscal 1998 Fiscal 1997 Fiscal 1998 Fiscal 1997
-------------------------------------------------------------------------------------------------
TV 16% 17% 16% 17%
-------------------------------------------------------------------------------------------------
VCR/Camcorders 14 14 14 14
-------------------------------------------------------------------------------------------------
Audio 16 17 17 18
-------------------------------------------------------------------------------------------------
Home Office 23 23 24 23
-------------------------------------------------------------------------------------------------
Appliances 19 19 18 18
-------------------------------------------------------------------------------------------------
Other 12 10 11 10
=================================================================================================
TOTAL 100% 100% 100% 100%
=================================================================================================
</TABLE>

Circuit City's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, the Group 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 rose to 25.0 percent of sales in the second quarter of
fiscal 1998 from 23.6 percent for the same period last year. For the six months
ended August 31, 1997, gross margins increased to 24.5 percent of sales from
23.5 percent in the first half of fiscal 1997.

The gross profit margin increase reflects strong inventory management, limited
personal computer sales and strength in the major appliance and wireless
communications categories for the full quarter. During the second half of the
fiscal year, management expects that the competitive climate in the electronics
business and changes in the Circuit City merchandise mix will continue to affect
gross margins.

Selling, General and Administrative Expenses
- --------------------------------------------

The Group's selling, general and administrative expense ratio increased from
20.1 percent of sales in the second quarter of last year to 22.1 percent for the
same period this year. For the six-month period ended August 31, 1997, the
expense ratio was 22.2 percent of sales compared with 20.7 percent in the same
period last year.

The higher ratio primarily reflects the impact of lower comparable store sales,
a lower earnings contribution from the credit card bank subsidiary and a second
quarter impact from the Group's Divx investment of approximately 25 basis points
versus 16 basis points for the same period last year.

Interest Expense
- ----------------

Interest expense was 0.3 percent of sales in the second quarter and first six
months of both fiscal 1998 and fiscal 1997.

Income Taxes
- ------------

The effective income tax rate was 38.1 percent in the second quarter of both
fiscal 1998 and fiscal 1997. For the six months ended August 31, 1997, the
effective income tax rate was 38.1 percent compared with 38.0 percent in the
same period last year.

19 of 32
<PAGE>

Earnings Before Inter-Group Interest in the CarMax Group
- --------------------------------------------------------

For the second quarter, earnings before Inter-Group Interest in the CarMax Group
declined 10 percent from $32.6 million in fiscal 1997 to $29.2 million in fiscal
1998.

For the six months ended August 31, 1997, earnings before Inter-Group Interest
in the CarMax Group were $42.9 million, a decline of 12 percent from $49.0
million in the same period last year.

Net Loss Related to Inter-Group Interest in the CarMax Group
- ------------------------------------------------------------

As expected, the CarMax Group incurred a net loss for the quarter and six months
ended August 31, 1997. The net loss attributable to the Circuit City Group's
Inter-Group Interest in the CarMax Group was $1.3 million in the second quarter
and $2.3 million in the first six months of fiscal 1998, compared with a net
loss of $1.0 million in the second quarter and $0.6 million in the first half of
fiscal 1997.

Net Earnings
- ------------

Net earnings for the quarter ended August 31, 1997, decreased 12 percent to
$27.9 million from $31.6 million in the same period last year. Net earnings per
share declined 13 percent to 28 cents from 32 cents.

For the six months ended August 31, 1997, net earnings decreased 16 percent to
$40.6 million from $48.4 million in the same period last year. Net earnings per
share declined 16 percent to 41 cents from 49 cents.

For the second quarter, the investment in Divx reduced Circuit City Group net
earnings by $2.8 million this year compared with $1.6 million last year. The
Divx investment reduced Circuit City Group net earnings by $5.4 million for the
first six months of fiscal 1998, compared with $3.4 million for the same period
last year.

Liquidity and Capital Resources
- -------------------------------

Total assets at August 31, 1997, were $3,117.1 million, up $108.8 million or 4
percent since February 28, 1997. An increase in the inter-group note receivable
of $123.9 million was the primary contributor to total asset growth. A decrease
in the rate of securitization of credit card accounts increased net accounts and
notes receivable by $17.8 million. A decrease in inventory of $17.0 million
reflects improved inventory management. Property and equipment decreased $9.5
million, largely because of completed sale-leaseback transactions.

The $41.2 million increase in accounts payable since the end of fiscal 1997 is
attributable to planned and completed store openings.

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. The master trust
vehicle permits further expansion of the securitization program to meet future
needs. As of August 31, 1997, the master trust program had a total program
capacity of $1.18 billion. As of August 31, 1997, the Company's credit card bank
subsidiary had an additional asset securitization program allowing the transfer
of up to $1.56 billion in receivables related to its other bank card programs.
The Company anticipates that it will be able to expand its securitization
programs to meet future needs.

20 of 32
<PAGE>

cents, including 3 cents recorded in the first quarter, 3 cents for the second
quarter, 7 cents for the third quarter and another 14 cents in the fourth
quarter. The remainder of the investment is expected to reduce net earnings per
share in next fiscal year's first quarter by approximately 14 cents. (For
further information about Divx see Part II., Item 5.)

The Group relies on the Company's external debt attributable to the Group to
provide working capital needed to fund net assets not otherwise disposed of
through sale-leasebacks or receivables securitizations. All significant
financial activities of the Group are managed on a centralized basis and are
dependent on the financial condition of the Company as a whole. 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 also maintained $410 million in seasonal lines that are renewed annually
with various banks and a $150 million revolving credit facility.

Forward-Looking Statements
- --------------------------

This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of new concepts.

Divx, as a development stage enterprise, has had no product sales and there is
no assurance that its research and development efforts will be successful, that
it will ever have commercially accepted products, or that it will achieve
significant sales of any such products. Other risks include Divx's limited
operating history, history of operating losses, no assurance of successful
operations, early state of market development, acquiring and maintaining
licensing and manufacturing agreements, competition from substitute products and
services, rapid technological change, dependence on key personnel, development
or assertions by or against the Company relating to intellectual property
rights, and the uncertainty of availability of additional financing.

21 of 32

<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CIRCUIT CITY STORES, INC. - CARMAX GROUP
----------------------------------------
Balance Sheets
--------------
(Amounts in thousands)
<TABLE>
<S> <C>
Aug. 31, 1997 Feb. 28, 1997
------------- -------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 130,046 $ 170,421
Net accounts receivable 45,917 28,350
Inter-group receivable 98,006 48,147
Inventory 128,758 82,260
Prepaid expenses and other current assets 7,528 4,102
-------------- -------------

Total current assets 410,255 333,280

Property and equipment, net 162,773 92,174
Deferred income taxes 1,468 42
Other assets 1,651 1,691
-------------- -------------

TOTAL ASSETS $ 576,147 $ 427,187
============== =============

LIABILITIES AND GROUP EQUITY
- ----------------------------
Current liabilities:
Accounts payable 53,511 28,293
Inter-group note payable 123,911 -
Deferred income taxes 3,608 2,424
Accrued expenses and other current liabilities 3,160 2,059
-------------- -------------

Total current liabilities 184,190 32,776

Deferred revenue and other liabilities 3,109 2,595
-------------- -------------

TOTAL LIABILITIES 187,299 35,371

GROUP EQUITY 388,848 391,816
-------------- -------------

TOTAL LIABILITIES AND GROUP EQUITY $ 576,147 $ 427,187
============== =============
</TABLE>

See accompanying notes to group financial statements.

22 of 32
<PAGE>

CIRCUIT CITY STORES, INC. - CARMAX GROUP
----------------------------------------
Statements of Operations (Unaudited)
------------------------
(Amounts in thousands except per share data)
<TABLE>
<S> <C>
Three Months Ended Six Months Ended
August 31, August 31,
1997 1996 1997 1996
-------------- ------------- ------------- --------------

Net sales and operating revenues $ 206,433 $ 132,216 $ 383,987 $ 256,910

Cost of sales 187,563 121,269 348,488 233,844
-------------- ------------- ------------- --------------

Gross profit 18,870 10,947 35,499 23,066
-------------- ------------- ------------- --------------

Selling, general and administrative expenses 21,423 11,585 39,591 21,834

Interest expense 299 1,155 765 2,275
-------------- ------------- ------------- --------------

Total expenses 21,722 12,740 40,356 24,109
-------------- ------------- ------------- --------------

Loss before income tax benefit 2,852 1,793 4,857 1,043

Income tax benefit 1,112 745 1,894 433
-------------- ------------- ------------- --------------

Net loss $ 1,740 $ 1,048 $ 2,963 $ 610
============== ============= ============= ==============

Net loss attributable to:

Circuit City Group common stock $ 1,347 $ 1,048 $ 2,295 $ 610
============= ==============

CarMax Group common stock 393 668
-------------- -------------
$ 1,740 $ 2,963
============== =============

Weighted average common shares 21,915 21,893
============== =============

Net loss per share $ 0.02 $ 0.03
============== =============

Dividends paid per common share $ - $ -
============== =============

</TABLE>

See accompanying notes to group financial statements.

23 of 32

<PAGE>

CIRCUIT CITY STORES, INC. - CARMAX GROUP
----------------------------------------
Statements of Cash Flows (Unaudited)
------------------------
(Amounts in thousands)

<TABLE>
<S> <C>
Six Months Ended
August 31,
1997 1996
-------------- -------------
Operating Activities:
- ---------------------
Net loss $ (2,963) $ (610)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,902 857
Provision for deferred income taxes (242) 779
Increase in deferred revenue and other liabilities 514 620
Increase in net accounts receivable (17,567) (9,106)
(Increase) decrease in inventory, prepaid expenses
and other current assets (49,924) 2,103
Decrease (increase) in other assets 40 (1,685)
Increase in accounts payable, accrued expenses and
other current liabilities, and accrued income taxes 26,319 5,098
-------------- -------------
Net cash used in operating activities (41,921) (1,944)
-------------- -------------

Investing Activities:
- ---------------------
Purchases of property and equipment (113,603) (25,821)
Proceeds from sales of property and equipment 41,102 3,707
Increase in inter-group receivable, net (49,859) -
-------------- -------------
Net cash used in investing activities (122,360) (22,114)
-------------- -------------

Financing Activities:
- ---------------------
Proceeds from issuance of short-term debt, net - 17,904
Proceeds from issuance of long-term debt, net - 9,791
Proceeds from issuance of inter-group note payable, net 123,911 -
Equity issuances, net (5) -
-------------- -------------
Net cash provided by financing activities 123,906 27,695
-------------- -------------

(Decrease) increase in cash and cash equivalents (40,375) 3,637
Cash and cash equivalents at beginning of year 170,421 2,219
-------------- -------------
Cash and cash equivalents at end of period $ 130,046 $ 5,856
============== =============

</TABLE>

See accompanying notes to group financial statements.

24 of 32
<PAGE>

CIRCUIT CITY STORES, INC. - CARMAX GROUP
----------------------------------------
Notes to Group Financial Statements
-----------------------------------
(Unaudited)

1. Basis of Presentation
---------------------

Notwithstanding the attribution of the Company's assets and liabilities
(including contingent liabilities) and stockholders' equity between the
CarMax Group and the Circuit City Group for the purposes of preparing their
respective financial statements, holders of CarMax Group Stock and holders
of Circuit City Group Stock are shareholders of the Company and subject to
all of the risks associated with an investment in the Company and all of
its businesses, assets and liabilities. Such attribution and the change in
the equity structure of the Company does not affect title to the assets or
responsibility for the liabilities of the Company or any of its
subsidiaries. The results of operations or financial condition of one Group
could affect the results of operations or financial condition of the other
Group. Accordingly, the CarMax Group financial statements included herein
should be read in conjunction with the consolidated and Circuit City Group
financial statements and with the notes to the consolidated and group
financial statements included in the Company's 1997 annual report to
shareholders.

2. Accounting Policies
-------------------

The financial statements of the CarMax Group 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 group financial statements have been included.
The fiscal year-end balance sheet data was derived from audited financial
statements.

Derivative Financial Instruments

The Company enters into interest rate swap agreements to manage exposure to
interest rates and to more closely match funding costs to the use of the
funding.

25 of 32
<PAGE>

3. Earnings Per Share
------------------

4. Inter-Group Note Payable
------------------------

During the first quarter, the CarMax Group entered into an inter-group note
with the Circuit City Group to finance inventory purchases until a
permanent inventory financing vehicle is established. The note is payable
upon demand and bears interest at the Company's average borrowing rate.
Interest incurred on the note is recorded as interest expense. The balance
as of August 31, 1997, was $123.9 million and is included with current
liabilities on the balance sheet.

5. Interest Rate Swaps
-------------------

On behalf of the CarMax Group, the Company, during the quarter, entered
into a 40-month amortizing swap with a notional amount of approximately $35
million related to the auto loan receivable securitization. The total
notional amount of the CarMax swaps was approximately $163 million at
August 31, 1997, and $114 million at February 28, 1997. These swaps were
entered into as part of the sale of receivables and, therefore, are
included in the gain on the sale of receivables.

26 of 32

<PAGE>

ITEM 2.

CARMAX GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF
----------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------

Net Sales and Operating Revenues and General Comments
- -----------------------------------------------------

Sales for the second quarter of fiscal 1998 were $206.4 million, an increase of
56 percent from $132.2 million in the same period last year. For the six months
ended August 31, 1997, total sales for the CarMax Group rose 49 percent to
$384.0 million from $256.9 million in the same period last year. The total sales
increase reflects six locations opened since the second quarter of last year and
a CarMax comparable store sales increase. CarMax comparable store sales
increases for the second quarter and first six months of fiscal years 1998 and
1997 were as follows:
<TABLE>
<S> <C>
--------------------------------- --------------------------- ----------------------------
FY `98 2nd Quarter Six Months
--------------------------------- --------------------------- ----------------------------

JUN JUL AUG FY '98 FY `97 FY '98 FY '97
----------- ----------- --------- ------------ -------------- ------------- --------------
6% 10% 11% 9% 26% 11% 21%
----------- ----------- --------- ------------ -------------- ------------- --------------
</TABLE>

CarMax's comparable store sales increase for the second quarter reflects
continued strong sales performance for the existing store base. At the end of
the quarter, CarMax became the first used-car Superstore specialist operating in
one of the nation's top five markets when it entered Washington/Baltimore with
its largest Superstore to date. In June, CarMax opened its third Atlanta, Ga.
location, which sells used cars and new cars under an agreement with Chrysler
Corporation. In July, two CarMax locations were opened in Houston, Texas. During
September, CarMax opened two Superstores, including its first stores in the
Dallas/Ft. Worth market and in West Palm Beach, Florida. CarMax plans to have
opened approximately 10 locations by the end of fiscal 1998.
<TABLE>
<S> <C>
------------------------------------------------------------------------------------------------------------------
Stores Open At End of Quarter Estimate
---------------------------------------------
Aug. 31, 1997 Aug. 31, 1996 Feb. 28, 1998 Feb. 28, 1997
------------------------------------------------------------------------------------------------------------------
"C" Superstore 2 1 5 1
------------------------------------------------------------------------------------------------------------------
"B" Superstore 3 1 5 3
------------------------------------------------------------------------------------------------------------------
"A" Superstore 6 3 7 3
==================================================================================================================
TOTAL 11 5 17 7
==================================================================================================================
</TABLE>

CarMax's operations, in common with other retailers in general, are subject to
seasonal influences. Historically, CarMax stores have realized more of their net
sales in the first two quarters of the fiscal year. The net earnings of any
interim quarter are seasonally disproportionate to each store's 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
- -------------

The gross profit margin rose to 9.1 percent of sales in the second quarter of
fiscal 1998 from 8.3 percent for the same period last year. For the six months
ended August 31, 1997, gross margins rose to 9.2 percent of sales from 9.0
percent in the first half of fiscal 1997. The increase in gross margins
primarily reflects continued

27 of 32
<PAGE>

improvements in inventory management and the shifts in the vehicle sales mix.

Selling, General and Administrative Expenses
- --------------------------------------------

As anticipated, the CarMax Group's selling, general and administrative expense
ratio increased from 8.8 percent of sales in the second quarter of last year to
10.4 percent for the same period this year primarily because of increased
expansion and associated corporate overhead costs. For the six months ended
August 31, 1997, the expense ratio increased to 10.3 percent of sales from 8.5
percent for the same period last year.

Interest Expense
- ----------------

Interest expense decreased from 0.9 percent of sales in the second quarter of
fiscal 1997 to 0.1 percent of sales in the same period this year. For the six
months ended August 31, 1997, interest expense was 0.2 percent of sales compared
with 0.9 percent in the same period last year. In fiscal 1997, interest expense
was incurred on allocated debt used primarily to fund store expansion, inventory
purchases and working capital. The decrease in interest expense as a percent of
sales in this year's second quarter and first six months reflects the repayment
of Circuit City debt allocated to the CarMax Group, using funds raised through
the CarMax equity offering.

Income Taxes
- ------------

The effective income tax rate was 39.0 percent in the second quarter of fiscal
1998 versus 41.6 percent in the same period last year. For the six months ended
August 31, 1997, the effective income tax rate was 39.0 percent compared with
41.5 percent in the same period last year and primarily reflects lower effective
rates for state taxes.

Net Loss
- --------

As expected, the CarMax Group incurred a net loss for the quarter ended August
31, 1997, of $1.7 million versus a net loss of $1.0 million for the same period
last year. The net loss attributable to the CarMax Group stock outstanding was 2
cents per share in the second quarter of this fiscal year; no CarMax Group stock
was outstanding in the second quarter of the prior fiscal year.

The net loss for the six months ended August 31, 1997, was $3.0 million compared
with a net loss of $0.6 million for the same period last year. The net loss
attributable to the CarMax Group stock outstanding was 3 cents per share in the
first six months of this fiscal year; no CarMax Group stock was outstanding in
the first six months of the prior fiscal year.

Liquidity and Capital Resources
- -------------------------------

Total assets at August 31, 1997, were $576.1 million, up $148.9 million or 35
percent since February 28, 1997. The largest contributor to the asset increase
was a $70.6 million increase in property and equipment, largely because of
planned store openings. Net accounts receivable increased by $17.6 million,
resulting from increased auto loans made by First North American Credit
Corporation, the Group's installment lending division.

To support new store expansion and the purchase of inventory, accounts payable
increased $25.2 million and the inter-group note payable increased $123.9
million from the end of fiscal 1997.

As of August 31, 1997, the Company had an asset securitization program operated
through a special purpose subsidiary on behalf of the CarMax Group that allowed
the transfer of up to $225 million in auto loan receivables. The Company
anticipates that it will be able to expand the CarMax securitization programs to
meet future needs.

28 of 32
<PAGE>

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 on a centralized basis
and are dependent on the financial condition of the Company as a whole. Such
financial activities include the investment of surplus cash, issuance and
repayment of debt, securitization of receivables and sale-leasebacks of real
estate. At August 31, 1997, the Company also maintained $410 million in seasonal
lines that are renewed annually with various banks as well as a $150 million
revolving credit facility.

Forward-Looking Statements
- --------------------------

This report contains forward-looking statements, which are subject to risks and
uncertainties, including, but not limited to, risks associated with the
development of a new retail concept. Additional discussion of factors that could
cause actual results to differ materially from management's projections,
forecasts, estimates and expectations is contained in the Company's 1997 SEC
filings, including the Company's report on Form 10-K for the year ended February
28, 1997.

29 of 32

<PAGE>

PART II. OTHER INFORMATION

Item 5. Other Information.

On September 8, 1997, the Company announced that it will increase its investment
in Digital Video Express, LP, a partnership that has developed a new system for
DVD players which is designed to provide significant copyright protection for
movies released on Divx digital discs and is expected to set a new standard for
home video convenience.

A commitment to invest an additional $100 million positions the Company as
Divx's majority partner, with approximately two-thirds of the equity. The
remaining equity is held directly or indirectly by members of the Los Angeles
entertainment law firm Ziffren, Brittenham, Branca & Fischer. The investment in
Divx is allocated to the Circuit City Group.

The new Divx system has won support from major movie studios, including Disney's
Buena Vista Home Entertainment, Paramount Home Video, Inc., Universal Home
Video, Inc. and DreamWorks SKG, and from leading consumer electronics
manufacturers, including Zenith Electronics Corporation, Thomson Consumer
Electronics and Matsushita Electric. Divx allows consumers to purchase physical
ownership of a special, encrypted movie disc for a suggested price of less than
$5. The purchase price includes a two-day viewing period that begins when the
consumer inserts the disc into a DVD player equipped with the Divx capability
and pushes play for the first time. Divx players will play all standard DVD
discs, but the lower-priced Divx discs cannot be played on standard DVD players.

The Divx disc is never returned so the consumer never has to pay late fees. The
disc can become part of the consumer's home video library, with additional
viewing periods easily purchased through the Divx player. Consumers also will be
able, through the player, to convert many titles to unlimited viewing for a
one-time fee, and certain titles will be available for purchase in the store as
unlimited viewing discs.

Because the discs are purchased by the consumer, Divx expects to make ample
supply available to meet the high demand that occurs when new titles are
released to the rental market. The movie studios have signed multi-year
agreements to provide all new titles and almost a thousand catalog titles for
release on Divx discs. Divx's new titles will be released to the public on the
same date as VHS tapes. More than 100 titles are expected to be available at
product launch, with a total of approximately 500 available within the first
year.

Zenith expects to introduce Divx players as part of the high-end Zenith-Inteq
series in a limited launch next spring. Thomson, under the RCA and Proscan brand
names, and Matsushita, under the Panasonic brand name, expect to offer players
nationwide next summer.

Divx will license and distribute studio productions in its proprietary, digital
format and authorize access to those productions via its host computer system.
Divx also will license the proprietary hardware architecture to the consumer
electronics manufacturers.

30 of 32

<PAGE>

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Index to Exhibits:

(3) Articles of Incorporation and Bylaws

(i) Bylaws of the Company as amended and restated
August 19, 1997, are filed herewith.

(27) Financial Data Schedule

(b) Reports on Form 8-K

None.
31 of 32

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

CIRCUIT CITY STORES, INC.

By: s/Richard L. Sharp
Richard L. Sharp
Chairman of the Board and
Chief Executive Officer

By: s/Michael T. Chalifoux
Michael T. Chalifoux
Senior Vice President,
Chief Financial Officer and
Corporate Secretary

By: s/Philip J. Dunn
Philip J. Dunn
Vice President, Treasurer,
Corporate Controller and
Chief Accounting Officer

October 15, 1997

32 of 32

CIRCUIT CITY STORES, INC.

BYLAWS

AS AMENDED AND RESTATED

August 19, 1997

TABLE OF CONTENTS

ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 Place and Time of Meetings. . . . . . . . . . . . . . . . . . . 1
1.2 Organization and Order of Business. . . . . . . . . . . . . . . 1
1.3 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . 3
1.5 Record Dates. . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.6 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . 3
1.7 Waiver of Notice; Attendance at Meeting . . . . . . . . . . . . 4
1.8 Quorum and Voting Requirements. . . . . . . . . . . . . . . . . 4
1.9 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.10 Voting List. . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE II
DIRECTORS
2.1 General Powers. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Number and Term . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Nomination of Directors . . . . . . . . . . . . . . . . . . . . 6
2.4 Election. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5 Removal; Vacancies. . . . . . . . . . . . . . . . . . . . . . . 7
2.6 Annual and Regular Meetings . . . . . . . . . . . . . . . . . . 8
2.7 Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . 8
2.8 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . 8
2.9 Waiver of Notice; Attendance at Meeting . . . . . . . . . . . . 9
2.10 Quorum; Voting . . . . . . . . . . . . . . . . . . . . . . . . 9
2.11 Telephonic Meetings. . . . . . . . . . . . . . . . . . . . . . 9
2.12 Action Without Meeting . . . . . . . . . . . . . . . . . . . . 9
2.13 Compensation.. . . . . . . . . . . . . . . . . . . . . . . . .10
2.14 Director Emeritus. . . . . . . . . . . . . . . . . . . . . . .10
2.15 Chairman and Vice Chairman.. . . . . . . . . . . . . . . . . .10

ARTICLE III
COMMITTEES OF DIRECTORS
3.1 Committees. . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.2 Authority of Committees . . . . . . . . . . . . . . . . . . . .10
3.3 Executive Committee.. . . . . . . . . . . . . . . . . . . . . .11
3.4 Audit Committee.. . . . . . . . . . . . . . . . . . . . . . . .11
3.5 Nominating and Structure Committee. . . . . . . . . . . . . . .11
3.6 Compensation and Personnel Committee. . . . . . . . . . . . . .12
3.7 Committee Meetings; Miscellaneous.. . . . . . . . . . . . . . .13

ARTICLE IV
OFFICERS
4.1 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
4.2 Election; Term. . . . . . . . . . . . . . . . . . . . . . . . .13
4.3 Removal of Officers.. . . . . . . . . . . . . . . . . . . . . .13
4.4 Duties of the President.. . . . . . . . . . . . . . . . . . . .13
4.5 Duties of the Vice President. . . . . . . . . . . . . . . . . .14
4.6 Duties of the Secretary.. . . . . . . . . . . . . . . . . . . .14
4.7 Duties of the Chief Financial Officer.. . . . . . . . . . . . .14
4.8 Duties of the Assistant Secretary.. . . . . . . . . . . . . . .14
4.9 Duties of Other Officers. . . . . . . . . . . . . . . . . . . .14
4.10 Voting Securities of Other Corporations. . . . . . . . . . . .15
4.11 Compensation.. . . . . . . . . . . . . . . . . . . . . . . . .15
4.12 Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

ARTICLE V
EVIDENCE OF SHARES
5.1 Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.2 Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
5.3 Restrictions on Transfer. . . . . . . . . . . . . . . . . . . .16
5.4 Lost or Destroyed Share Certificates. . . . . . . . . . . . . .16
5.5 Registered Shareholders.. . . . . . . . . . . . . . . . . . . .16

ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 Certain Definitions.. . . . . . . . . . . . . . . . . . . . . .17
6.2 Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . .17
6.3 Fiscal Year.. . . . . . . . . . . . . . . . . . . . . . . . . .17
6.4 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . .17
6.5 General.. . . . . . . . . . . . . . . . . . . . . . . . . . . .17

<PAGE>

CIRCUIT CITY STORES, INC.
BYLAWS

ARTICLE I
MEETINGS OF SHAREHOLDERS

1.1 Place and Time of Meetings. Meetings of shareholders shall be held at
the principal office of the Corporation or at such place, either within or
without the Commonwealth of Virginia, and at such time as may be provided in the
notice of the meeting and approved by the Board of Directors.

1.2 Organization and Order of Business. The Chairman or, in the Chairman's
absence, the President shall serve as chairman at all meetings of the
shareholders. In the absence of both of the foregoing persons or if both of them
decline to serve, a majority of the shares entitled to vote at a meeting may
appoint any person entitled to vote at the meeting to act as chairman. The
Secretary or, in the Secretary's absence, an Assistant Secretary shall act as
secretary at all meetings of the shareholders. In the event that neither the
Secretary nor an Assistant Secretary is present, the chairman of the meeting may
appoint any person to act as secretary of the meeting.

The Chairman shall have the authority to make such rules and regulations,
to establish such procedures and to take such steps as he or she may deem
necessary or desirable for the proper conduct of each meeting of the
shareholders, including, without limitation, the authority to make the agenda
and to establish procedures for (i) dismissing of business not properly
presented, (ii) maintaining of order and safety, (iii) placing limitations on
the time allotted to questions or comments on the affairs of the Corporation,
(iv) placing restrictions on attendance at a meeting by persons or classes of
persons who are not shareholders or their proxies, (v) restricting entry to a
meeting after the time prescribed for the commencement thereof and (vi)
commencing, conducting and closing voting on any matter.

Any business which might properly have been conducted on an original
meeting date may come before an adjourned meeting when reconvened.

1.3 Annual Meeting. The annual meeting of shareholders shall be held on the
Tuesday in June of each year which is closest to June 16. If such day is a legal
holiday, then the annual meeting of shareholders shall be held on the next
succeeding business day. Alternatively, the annual meeting may be held at such
other time as may be provided in the notice of the meeting and approved by the
Board of Directors.

At each annual meeting of shareholders, only such business shall be
conducted as is proper to consider and has been brought before the meeting (i)
pursuant to the Corporation's notice of the meeting, (ii) by or at the direction
of the Board of Directors or (iii) by a shareholder who is a shareholder of
record of a class of shares entitled to vote on the business such shareholder is
proposing and who is such a shareholder of record, both at the time of the
giving of the shareholder's notice hereinafter described in this Section 1.3 and
on the record date for such annual meeting, and who complies with the notice
procedures set forth in this Section 1.3.

In order to bring before an annual meeting of shareholders any business
which may properly be considered and which a shareholder has not sought to have
included in the Corporation's proxy statement for the meeting, a shareholder who
meets the requirements set forth in the preceding paragraph must give the
Corporation timely written notice. To be timely, a shareholder's notice must be
given, either by personal delivery to the Secretary or an Assistant Secretary at
the principal office of the Corporation or by first class United States mail,
with postage thereon prepaid, addressed to the Secretary at the principal office
of the Corporation. 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 of such meeting, as prescribed in these bylaws, has been
changed by more than 30 days.

Each such shareholder's notice shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) the name and
address, as they appear on the Corporation's stock transfer books, of the
shareholder proposing business, (ii) the class and number of shares of stock of
the Corporation beneficially owned by such shareholder, (iii) a representation
that such shareholder is a shareholder of record at the time of the giving of
the notice and intends to appear in person or by proxy at the meeting to present
the business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented and the reasons for wanting to conduct such business
and (v) any interest which the shareholder may have in such business.

The Secretary or Assistant Secretary shall deliver each shareholder's
notice that has been timely received to the Chairman for review.

Notwithstanding the foregoing provisions of this Section 1.3, a shareholder
seeking to have a proposal included in the Corporation's proxy statement for an
annual meeting of shareholders shall comply with the requirements of Regulation
14A under the Securities Exchange Act of 1934, as amended from time to time, or
with any successor regulation.

1.4 Special Meetings. Special meetings of the shareholders may be called
only by the Chairman, the President or the Board of Directors. Only business
within the purpose or purposes described in the notice for a special meeting of
shareholders may be conducted at the meeting.

1.5 Record Dates. The Board of Directors shall fix, in advance, a record
date to make a determination of shareholders entitled to notice of or to vote at
any meeting of shareholders or to receive any dividend or for any purpose, such
date to be not more than 70 days before the meeting or action requiring a
determination of shareholders.

When a determination of shareholders entitled to notice of or to vote at
any meeting of shareholders has been made, such determination shall be effective
for any adjournment of the meeting unless the Board of Directors fixes a new
record date, which it shall do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.

1.6 Notice of Meetings. Written notice stating the place, day and hour of
each meeting of shareholders and, in the case of a special meeting, the purpose
or purposes for which the meeting is called, shall be given by mail not less
than 10 nor more than 60 days before the date of the meeting (except when a
different time is required in these Bylaws or by law) to each shareholder of
record entitled to vote at such meeting. Such notice shall be deemed to be
effective when deposited in first class United States mail with postage thereon
prepaid and addressed to the shareholder at his or her address as it appears on
the share transfer books of the Corporation.

Notice of a shareholder's meeting to act on (i) an amendment of the
Articles of Incorporation, (ii) a plan of merger or share exchange, (iii) the
sale, lease, exchange or other disposition of all or substantially all the
property of the Corporation otherwise than in the usual and regular course of
business or (iv) the dissolution of the Corporation, shall be given, in the
manner provided above, not less than 25 nor more than 60 days before the date of
the meeting. Any notice given pursuant to this section shall state that the
purpose, or one of the purposes, of the meeting is to consider such action and
shall be accompanied by (x) a copy of the proposed amendment, (y) a copy of the
proposed plan of merger or share exchange or (z) a summary of the agreement
pursuant to which the proposed transaction will be effected. If only a summary
of the agreement is sent to the shareholders, the Corporation shall also send a
copy of the agreement to any shareholder who requests it.

If a meeting is adjourned to a different date, time or place, notice need
not be given if the new date, time or place is announced at the meeting before
adjournment. However, if a new record date for an adjourned meeting is fixed,
notice of the adjourned meeting shall be given to shareholders as of the new
record date unless a court provides otherwise.

Notwithstanding the foregoing, no notice of a meeting of shareholders need
be given to a shareholder if (i) an annual report and proxy statements for two
consecutive annual meetings of shareholders or (ii) all, and at least two,
checks in payment of dividends or interest on securities during a 12-month
period, have been sent by first-class United States mail, with postage thereon
prepaid, addressed to the shareholder at his or her address as it appears on the
share transfer books of the Corporation, and returned undeliverable. The
obligation of the Corporation to give notice of meetings of shareholders to any
such shareholder shall be reinstated once the Corporation has received a new
address for such shareholder for entry on its share transfer books.

1.7 Waiver of Notice; Attendance at Meeting. A shareholder may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time of the meeting that is the subject of such notice. The
waiver shall be in writing, be signed by the shareholder entitled to the notice
and be delivered to the Secretary for inclusion in the minutes or filing with
the corporate records.

A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting unless the shareholder, at the
beginning of the meeting, objects to holding the meeting or transacting business
at the meeting and (ii) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice unless the shareholder objects to considering the matter when it
is presented.

1.8 Quorum and Voting Requirements. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or shall be set
for that adjourned meeting. If a quorum exists, action on a matter, other than
the election of directors, is approved if the votes cast favoring the action
exceed the votes cast opposing the action unless a greater number of affirmative
votes is required by law. Directors shall be elected by a plurality of the votes
cast by the shares entitled to vote in the election at a meeting at which a
quorum is present. Less than a quorum may adjourn a meeting.

1.9 Proxies. A shareholder may vote his or her shares in person or by
proxy. A shareholder may appoint a proxy to vote or otherwise act for such
shareholder by signing an appointment form, either personally or by his or her
attorney-in-fact. An appointment of a proxy is effective when received by the
Secretary or other officer or agent authorized to tabulate votes and is valid
for eleven (11) months unless a longer period is expressly provided in the
appointment form. An appointment of a proxy is revocable by the shareholder
unless the appointment form conspicuously states that it is irrevocable and the
appointment is coupled with an interest.

The death or incapacity of the shareholder appointing a proxy does not
affect the right of the Corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the Secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his or her
authority under the appointment. An irrevocable appointment is revoked when the
interest with which it is coupled is extinguished. A transferee for value of
shares subject to an irrevocable appointment may revoke the appointment if the
transferee did not know of its existence when the shares were acquired and the
existence of the irrevocable appointment was not noted conspicuously on the
certificate representing the shares or on the information statement for shares
without certificates. Subject to any legal limitations on the right of the
Corporation to accept the vote or other action of a proxy and to any express
limitation on the proxy's authority appearing on the face of the appointment
form, the Corporation is entitled to accept the proxy's vote or other action as
that of the shareholder making the appointment. Any fiduciary who is entitled to
vote any shares may vote such shares by proxy.

1.10 Voting List. The officer or agent having charge of the share transfer
books of the Corporation shall make, at least ten days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at such
meeting or any adjournment thereof, with the address of and the number of shares
held by each. For a period of ten days prior to the meeting, such list shall be
kept on file at the registered office of the Corporation or at its principal
office or at the office of its transfer agent or registrar and shall be subject
to inspection by any shareholder at any time during usual business hours. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purpose thereof. The original share transfer books shall
be prima facie evidence as to which shareholders are entitled to examine such
list or transfer books or to vote at any meeting of the shareholders. The right
of a shareholder to inspect such list prior to the meeting shall be subject to
the conditions and limitations set forth by law. If the requirements of this
section have not been substantially complied with, the meeting shall, on the
demand of any shareholder in person or by proxy, be adjourned until such
requirements are met. Refusal or failure to prepare or make available the
shareholders' list does not affect the validity of action taken at the meeting
prior to the making of any such demand, but any action taken by the shareholders
after the making of any such demand shall be invalid and of no effect.

ARTICLE II
DIRECTORS

2.1 General Powers. The Corporation shall have a Board of Directors. All
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation managed under the direction of, its
Board of Directors, and such officers and agents as the Board of Directors may
elect to employ, subject to any limitation set forth in the Articles of
Incorporation.

2.2 Number and Term. The number of directors shall be eleven (11). This
number may be increased or decreased from time to time by amendment to these
Bylaws to the extent permitted by law and by the Corporation's Articles of
Incorporation. Except as provided in Section 2.5, directors shall be elected for
terms of three (3) years in the manner set forth in the Articles of
Incorporation and shall serve until the election of their successors. No
decrease in the number of directors shall have the effect of changing the term
of any incumbent director. Unless a director resigns or is removed by the
majority vote of the shareholders, every director shall hold office for the term
elected or until a successor to such director shall have been elected.

2.3 Nomination of Directors. Nominations for the election of directors may
be made by the Board of Directors or by any shareholder entitled to vote in the
election of directors generally. However, any shareholder entitled to vote in
the election of directors generally may nominate one or more persons for
election as directors at a meeting only if written notice of such shareholder's
intent to make such nomination or nominations has been given, either by personal
delivery or by United States mail, postage prepaid, to the Secretary of the
Corporation 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.

Each such notice shall set forth: (a) the name and address of the
shareholder who intends to make the nomination and of the person or persons to
be nominated; (b) a representation that the shareholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the shareholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations 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 Securities and Exchange
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 Corporation if so elected. The Chairman may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.

2.4 Election. Except as provided in Section 2.5, the directors shall be
elected by the holders of the common shares at each annual meeting of
shareholders or at a special meeting called for such purpose. Those persons who
receive the greatest number of votes shall be deemed elected even though they do
not receive a majority of the votes cast. No individual shall be named or
elected as a director without such individual's prior consent.

2.5 Removal; Vacancies. The shareholders may remove one or more directors
with or without cause. If a director is elected by a voting group, only the
shareholders of that voting group may elect to remove the director. Unless the
Articles of Incorporation require a greater vote, a director may be removed if
the number of votes cast to remove the director constitutes a majority of the
votes entitled to be cast at an election of directors of the voting group or
voting groups by which such director was elected. A director may be removed by
the shareholders only at a meeting called for the purpose of removing such
director and the meeting notice must state that the purpose, or one of the
purposes of the meeting, is removal of the director.

A vacancy on the Board of Directors, including a vacancy resulting from the
removal of a director or an increase in the number of directors, may be filled
by (i) the shareholders, (ii) the Board of Directors or (iii) the affirmative
vote of a majority of the remaining directors though less than a quorum of the
Board of Directors and may, in the case of a resignation that will become
effective at a specified later date, be filled before the vacancy occurs but the
new director may not take office until the vacancy occurs. The foregoing
notwithstanding, the aggregate number of vacancies resulting from increases in
the number of directors which may be created and filled by action of the Board
of Directors between annual meetings of shareholders shall be limited to two.
Any director elected by the Board of Directors shall serve until the next annual
meeting of shareholders or until the election of a successor to such director.

2.6 Annual and Regular Meetings. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of shareholders for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the Chairman, the President or the Board of
Directors shall designate from time to time. If no place is designated, regular
meetings shall be held at the principal office of the Corporation.

2.7 Special Meetings. Special meetings of the Board of Directors may be
called by the President, the Board of Directors or any two Directors of the
Corporation and shall be held at such times and at such places, within or
without the Commonwealth of Virginia, as the person or persons calling the
meetings shall designate. If no such place is designated in the notice of a
meeting, it shall be held at the principal office of the Corporation.

2.8 Notice of Meetings. No notice need be given of regular meetings
of the Board of Directors.

Notices of special meetings of the Board of Directors shall be given to
each director in person or delivered to his or her residence or business address
(or such other place as the director may have directed in writing) not less than
twenty-four (24) hours before the meeting by mail, messenger, telecopy,
telegraph or other means of written communication or by telephoning such notice
to the director. Any such notice shall set forth the time and place of the
meeting.

2.9 Waiver of Notice; Attendance at Meeting. A director may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time stated in the notice and such waiver shall be equivalent
to the giving of such notice. Except as provided in the next paragraph of this
section, the waiver shall be in writing, signed by the director entitled to the
notice and filed with the minutes or corporate records.

A director's attendance at or participation in a meeting waives any
required notice to such director of the meeting unless the director, at the
beginning of the meeting or promptly upon arrival, objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting.

2.10 Quorum; Voting. A majority of the number of directors fixed in these
Bylaws shall constitute a quorum for the transaction of business at a meeting of
the Board of Directors. If a quorum is present when a vote is taken, the
affirmative vote of a majority of the directors present is the act of the Board
of Directors. A director who is present at a meeting of the Board of Directors
or a committee of the Board of Directors when corporate action is taken is
deemed to have assented to the action taken unless (i) the director objects, at
the beginning of the meeting or promptly upon arrival, to holding it or
transacting specified business at the meeting or (ii) the director votes against
or abstains from the action taken.

2.11 Telephonic Meetings. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.

2.12 Action Without Meeting. Action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if the action
is taken by all members of the Board. The action shall be evidenced by one or
more written consents stating the action taken, signed by each director either
before or after the action is taken and included in the minutes or filed with
the corporate records. Action taken under this section shall be effective when
the last director signs the consent unless the consent specifies a different
effective date in which event the action taken is effective as of the date
specified therein provided the consent states the date of execution by each
director.

2.13 Compensation. Directors shall not receive a stated salary for their
services, but directors may be paid a fixed sum and expenses for attendance at
any regular or special meeting of the Board of Directors or any meeting of any
Committee and such other compensation as the Board of Directors shall determine.
A director may serve or be employed by the Corporation in any other capacity and
receive compensation thereafter.

2.14 Director Emeritus. The Board may appoint to the position of Director
Emeritus any retiring director who has served not less than three years as a
director of the Corporation. Such person so appointed shall have the title of
"Director Emeritus" and shall be entitled to receive notice of, and to attend
all meetings of the Board, but shall not in fact be a director, shall not be
entitled to vote, shall not be counted in determining a quorum of the Board and
shall not have any of the duties or liabilities of a director under law.

2.15 Chairman and Vice Chairman. The Chairman of the Board, if one is
designated by the Board of Directors, shall preside at all meetings of the Board
and of shareholders and perform such other duties as the Board shall assign from
time to time. The Vice Chairman of the Board, if one is designated by the Board
of Directors, shall at the request of or in the absence of the Chairman of the
Board, preside at meetings of the Board and of shareholders and, when requested
to do so by the Board, shall perform all of the functions of the Chairman of the
Board during the absence or incapacity of the latter.

ARTICLE III
COMMITTEES OF DIRECTORS

3.1 Committees. The Board of Directors may create one or more committees
and appoint members of the Board of Directors to serve on them. Unless otherwise
provided in these Bylaws, each committee shall have two or more members who
serve at the pleasure of the Board of Directors. The creation of a committee and
appointment of members to it shall be approved by a majority of all of the
directors in office when the action is taken.

3.2 Authority of Committees. To the extent specified by the Board of
Directors, each committee may exercise the authority of the Board of Directors,
except that a committee may not (i) approve or recommend to shareholders action
that is required by law to be approved by shareholders, (ii) fill vacancies on
the Board of Directors or on any of its committees, (iii) amend the Articles of
Incorporation, (iv) adopt, amend, or repeal these Bylaws, (v) approve a plan of
merger not requiring shareholder approval, (vi) authorize or approve a
distribution, except according to a general formula or method prescribed by the
Board of Directors or (vii) authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares; provided, however,
that the Board of Directors may authorize a committee, or a senior executive
officer of the Corporation, to do so within limits specifically prescribed by
the Board of Directors.

3.3 Executive Committee. The Board of Directors may appoint an Executive
Committee consisting of not less than two directors which committee shall have
all of the authority of the Board of Directors except to the extent such
authority is limited by the provisions of Section 3.2.

3.4 Audit Committee. The Board of Directors shall appoint each year an
Audit Committee, all of whose members shall be independent directors (as defined
in Section 6.1) and which shall perform such duties as its members consider
necessary and desirable properly to evaluate and generally to supervise the
Corporation's accounting procedures including but not limited to the following:

1. Recommend independent public accountants for the Corporation to
the Board.

2. Determine that the scope of the audit is adequate and approve the
audit fee.

3. Review audit results with the Corporation's independent public
accountants.

4. Review and approve the retention of the outside auditors to
perform non-audit services and approve the fee therefor.

5. Recommend policy for the scope, frequency, and method of internal
audit reports and review the results thereof. Develop a direct line of
communication with internal auditors, if and when such are employed.

6. Review pending lawsuits.

7. Review insurance coverage.

The Audit Committee shall have complete access to the Corporation's
independent public accountants, internal auditors, if any, and inside and
outside general counsel.

3.5 Nominating and Structure Committee. The Board of Directors shall
appoint each year a Nominating and Structure Committee, which shall be composed
of at least three members of the Board, a majority of whom shall be independent
directors (as defined in Section 6.1). The functions of this Committee shall
include the following:

1. Review the performance and contributions of existing directors
for the purpose of recommending whether they be nominated for a
successive term.

2. Recommend policies with regard to the size, composition and
function of the Board.

3. Suggest persons to fill vacancies on the Board and maintain files
on names submitted.

4. Assist the Chairman of the Board in carrying out an orientation
program for new directors.

5. Review and recommend to the Board changes and improvements in the
functioning of the Board.

6. Review and recommend compensation levels for non-management
directors.

3.6 Compensation and Personnel Committee. The Board of Directors shall
appoint each year a Compensation and Personnel Committee, which shall be
composed of at least three members of the Board, all of whom shall be
independent directors (as defined in Section 6.1), and which shall have the
following duties:

1. Review and recommend to the Board current management compensation
programs including salaries, bonuses and fringe benefits and the
creation of new officerships.

2. Review and report to the Board on the funding and adequacy of existing
retirement programs, and recommend new programs, if appropriate. (This
responsibility does not include investment policy and other
responsibilities of the Trustees of the Retirement Plan.)

3. Award and administer pursuant to existing authority, the Corporation's
stock incentive programs and review and recommend similar future
programs, if any.

4. Review top management organization, assist the CEO in determining that
the Corporation has adequate depth and breadth of management to carry
out its expansion programs and to provide for succession in the event
of retirement or the unanticipated departure of a key executive.

5. Review the Corporation's programs for attracting, developing and
compensating management personnel at lower and middle levels.

3.7 Committee Meetings; Miscellaneous. The provisions of these Bylaws which
govern meetings, action without meetings, notice and waiver of notice, and
quorum and voting requirements of the Board of Directors shall apply to
committees of directors and their members as well.

ARTICLE IV
OFFICERS

4.1 Officers. The officers of the Corporation shall be a President, a
Secretary, a Chief Financial Officer, and, in the discretion of the Board of
Directors or the President, one or more Vice-Presidents and such other officers
as may be deemed necessary or advisable to carry on the business of the
Corporation. Any two or more offices may be held by the same person.

4.2 Election; Term. Officers shall be elected by the Board of Directors.
The President may, from time to time, appoint other officers. Officers elected
by the Board of Directors shall hold office, unless sooner removed, until the
next annual meeting of the Board of Directors or until their successors are
elected. Officers appointed by the President shall hold office, unless sooner
removed, until their successors are appointed. The action of the President in
appointing officers shall be reported to the next regular meeting of the Board
of Directors after it is taken. Any officer may resign at any time upon written
notice to the Board of Directors or the President and such resignation shall be
effective when notice is delivered unless the notice specifies a later effective
date.

4.3 Removal of Officers. The Board of Directors may remove any officer at
any time, with or without cause. The President may remove any officer he
appointed by the President at any time, with or without cause. Such action shall
be reported to the next regular meeting of the Board of Directors after it is
taken.

4.4 Duties of the President. The President shall be the Chief Executive
Officer of the Corporation and a member of the Board of Directors. The
President, in the absence of the Chairman of the Board and the Vice Chairman of
the Board, shall preside at all meetings of the Board of Directors and
shareholders, shall have power to call special meetings of the shareholders and
directors for any purpose; may hire, appoint and discharge employees and agents
of the Corporation and fix their compensation; may make and sign deeds,
mortgages, deeds of trust, notes, leases, powers of attorney, contracts and
agreements in the name and on behalf of the Corporation; shall have power to
carry into effect all directions of the Board of Directors; and shall have
general supervision of the business of the Corporation, except as may be limited
by the Board of Directors, the Articles of Incorporation, or these bylaws.

4.5 Duties of the Vice President. Such Vice Presidents, in the order
designated by the Board of Directors from time to time, shall exercise all of
the functions of the President during the absence or incapacity of the latter
and shall perform such other duties as may be assigned to them by the Board of
Directors or the President.

4.6 Duties of the Secretary. The Secretary shall be the ex-officio clerk of
the Board of Directors and shall give, or cause to be given, notices of all
meetings of shareholders and directors, and all other notices required by law or
by these Bylaws. The Secretary shall record the proceedings of the meetings of
the shareholders, Board of Directors and committees of the Board of Directors,
in books kept for that purpose and shall keep the seal of the Corporation and
attach it to all documents requiring such impression unless some other officer
is designated to do so by the Board of Directors. The Secretary shall also
perform such other duties as may be assigned by the Board of Directors or the
President.

4.7 Duties of the Chief Financial Officer. The Chief Financial Officer
shall keep or cause to be kept full and accurate books of account, and may make
and sign deeds, mortgages, deeds of trust, notes, leases, contracts and
agreements in the name and on behalf of the Corporation. Whenever required by
the Board of Directors or the President, the Chief Financial Officer shall
render a financial statement showing all transactions of the Corporation and the
financial condition of the Corporation.

4.8 Duties of the Assistant Secretary. There may be one or more Assistant
Secretaries who shall exercise all of the functions of the Secretary during the
absence or incapacity of the latter and such other duties as may be assigned
from time to time by the Board of Directors or the President.

4.9 Duties of Other Officers. The other officers of the Corporation, which
may include Assistant Vice Presidents, a Treasurer, Assistant Treasurers, a
Controller or Assistant Controllers, shall have such authority and perform such
duties as shall be prescribed by the Board of Directors or by officers
authorized by the Board of Directors to appoint them to their respective
offices. To the extent that such duties are not so stated, such officers shall
have such authority and perform the duties which generally pertain to their
respective offices, subject to the control of the President or the Board of
Directors.

4.10 Voting Securities of Other Corporations. Unless otherwise provided by
the Board of Directors, each of the President or the Chief Financial Officer, in
the name and on behalf of the Corporation, may appoint from time to time himself
or herself or any other person (or persons) proxy, attorney or agent for the
Corporation to cast the votes which the Corporation may be entitled to cast as a
shareholder, member or otherwise in any other corporation, partnership or other
legal entity, domestic or foreign, whose stock, interests or other securities
are held by the Corporation, or to consent in writing to any action by such
other entity, or to exercise any or all other powers of this Corporation as the
holder of the stock, interests or other securities of such other entity. Each of
the President or the Chief Financial Officer may instruct the person or persons
so appointed as to the manner of casting such votes or giving such consent and
may execute or cause to be executed on behalf of the Corporation and under its
corporate seal such written proxies, consents, waivers, or other instruments as
may be deemed necessary or proper. Each of the President or the Chief Financial
Officer may attend any meeting of the holders of stock, interests or other
securities of any such other entity and vote or exercise any or all other powers
of this Corporation as the holder of the stock, interest or other securities of
such other entity.

4.11 Compensation. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors or the Compensation and Personnel
Committee.

4.12 Bonds. The Board of Directors may require that any or all officers,
employees and agents of the Corporation give bond to the Corporation, with
sufficient sureties, conditioned upon the faithful performance of the duties of
their respective offices or positions.

ARTICLE V
EVIDENCE OF SHARES

5.1 Form. Shares of the Corporation shall, when fully paid, be evidenced by
certificates containing such information as is required by law and approved by
the Board of Directors. Alternatively, the Board of Directors may authorize the
issuance of some or all shares without certificates. In such event, within a
reasonable time after issuance, the Corporation shall mail to the shareholder a
written confirmation of its records with respect to such shares containing the
information required by law. When issued, certificates shall be signed by the
Chairman of the Board, the President or a Vice President designated by the Board
and the Secretary or an Assistant Secretary and may (but need not) be sealed
with the seal of the Corporation. The seal of the Corporation and any or all of
the signatures on a share certificate may be facsimile. If any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if such individual were such officer, transfer agent or
registrar on the date of issue.

5.2 Transfer. The Board of Directors may make rules and regulations
concerning the issue, registration and transfer of shares and/or certificates
representing the shares of the Corporation. Transfers of shares and/or of the
certificates representing such shares shall be made upon the books of the
Corporation by surrender of the certificates representing such shares, if any,
accompanied by written assignments given by the record owners thereof or their
attorneys-in-fact.

5.3 Restrictions on Transfer. A lawful restriction on the transfer or
registration of transfer of shares is valid and enforceable against the holder
or a transferee of the holder if the restriction complies with the requirements
of law and its existence is noted conspicuously on the front or back of any
certificate representing the shares or has been otherwise communicated in
accordance with the requirements of law. Unless so noted or communicated, a
restriction is not enforceable against a person without knowledge of the
restriction.

5.4 Lost or Destroyed Share Certificates. The Corporation may issue a new
share certificate or a written confirmation of its records with respect to
shares in the place of any certificate theretofore issued which is alleged to
have been lost or destroyed and may require the owner of such certificate, or
such owner's legal representative, to give the Corporation a bond, with or
without surety, or such other agreement, undertaking or security as the Board of
Directors shall determine is appropriate, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction or the issuance of any such new certificate.

5.5 Registered Shareholders. The Corporation shall be entitled to treat the
holder of record of any share or shares of stock as the owner thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person. The
Corporation shall not be liable for registering any transfer of shares which are
registered in the name of a fiduciary unless done with actual knowledge of facts
which would cause the Corporation's action in registering the transfer to amount
to bad faith.

ARTICLE VI
MISCELLANEOUS PROVISIONS

6.1 Certain Definitions. As used in these Bylaws, the term "independent"
has the following meaning: A director is considered to be independent if the
individual (i) is not currently a member of management, (ii) has not been a
member of management for at least five years, (iii) is not employed on a part
time or consulting basis by the Company, (iv) has no direct, personal
transaction in excess of $60,000 with the Company and (v) is not an owner of
more than 10% of an entity engaged in transactions with the Company exceeding 5%
of the lesser of the entity's or the Company's revenues.

6.2 Corporate Seal. The corporate seal of the Corporation shall be circular
and shall have inscribed thereon, within and around the circumference, the name
of the Corporation. In the center shall be the word "SEAL".

6.3 Fiscal Year. The fiscal year of the Corporation shall begin on the
first day of March of each year and end on the last day of February in the next
succeeding year.

6.4 Amendments. The power to alter, amend or repeal the Bylaws or adopt new
bylaws shall be vested in the Board of Directors unless otherwise provided in
the Articles of Incorporation. Bylaws adopted by the Board of Directors may be
repealed or changed or new bylaws adopted by the shareholders, and the
shareholders may prescribe that any bylaw adopted by them may not be altered,
amended or repealed by the Board of Directors.

6.5 General. Any matters not specifically covered by these Bylaws shall be
governed by the applicable provisions of the Code of Virginia in force at the
time.

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

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