Form 10-K

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SRVKlxxqL5FMfmjhfknn6p/dKxqO8KazAbbb3h8aqmB4hv+XDEYqDGBMZ6RGtNlW J+JSxz4vjvTkILPRzyD6Mg== 0000950168-03-001994.txt : 20030529 0000950168-03-001994.hdr.sgml : 20030529 20030529163730 ACCESSION NUMBER: 0000950168-03-001994 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20030228 FILED AS OF DATE: 20030529 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARMAX INC CENTRAL INDEX KEY: 0001170010 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 541821055 STATE OF INCORPORATION: VA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31420 FILM NUMBER: 03723822 BUSINESS ADDRESS: STREET 1: 4900 COX ROAD CITY: GLEN ALLEN STATE: VA ZIP: 22060 BUSINESS PHONE: 8047470422 MAIL ADDRESS: STREET 1: 4900 COX ROAD CITY: GLEN ALLEN STATE: VA ZIP: 23060 10-K 1 d10k.htm FORM 10-K Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 28, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-31420

CARMAX, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA

54-1821055

(State or other jurisdiction of

incorporation or organization)

((I.R.S. Employer

Identification No.)

4900 Cox Road

Glen Allen, VA 23060

(Address of principal executive offices)

Registrant’s telephone number, including area code: (804) 747-0422

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Exchange on Which Registered

Common Stock, par value $0.50

New York Stock Exchange

Rights to Purchase Series A Preferred Stock,

par value $20.00

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

None

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

Prior to October 1, 2002, CarMax, Inc. was a wholly owned subsidiary of Circuit City Stores, Inc. and held substantially all the businesses, assets and liabilities of Circuit City Stores, Inc. that constituted the CarMax Group. The CarMax Group common stock traded on the New York Stock Exchange as Circuit City Stores, Inc. – CarMax Group Common Stock. The aggregate market value of the voting CarMax Group common stock held by non-affiliates of Circuit City Stores, Inc. was $598,878,741 based upon the closing price of the group stock as reported by the New York Stock Exchange on August 30, 2002, which was the last business day of the registrant’s most recently completed second quarter.

Effective October 1, 2002, the CarMax Group separated from Circuit City Stores, Inc. As a result of the separation, CarMax, Inc. became an independent separately traded public company. On April 30, 2003, there were 103,259,470 outstanding shares of CarMax, Inc. common stock, par value $0.50 per share. The aggregate market value of the registrant’s common stock held by non-affiliates as of April 30, 2003, computed by reference to the closing price of the registrant’s common stock on the New York Stock Exchange on that date, was $2,183,937,790.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference in Parts I, II, III and IV of this Annual Report on Form 10-K: (1) Pages 16 through 46 of the company’s Annual Report to Shareholders for the fiscal year ended February 28, 2003, (Parts I, II and IV) and (2) “Election of Directors,” “Certain Relationships and Related Transactions,” “Share Ownership Table,” “Compensation and Personnel Committee Report,” “Executive Compensation” (excluding the information under the heading “8-Year History of Options”) and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement, dated May 15, 2003, and furnished to shareholders of the company in connection with the 2003 annual meeting of shareholders (Part III).

CARMAX, INC.

FORM 10-K

FOR FISCAL YEAR ENDED FEBRUARY 28, 2003

INDEX

		Page No.

PART I

Item 1.	Business	4

Item 2.	Properties	10

Item 3.	Legal Proceedings	10

Item 4.	Submission of Matters to a Vote of Security Holders	10

	Executive Officers of the Company	11

PART II

Item 5.	Market for the Company’s Common Equity and Related Stockholder Matters	12

Item 6.	Selected Financial Data	12

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	12

Item 8.	Consolidated Financial Statements and Supplementary Data	12

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	12

PART III

Item 10.	Directors and Executive Officers of the Company	12

Item 11.	Executive Compensation	13

Item 12.	Security Ownership of Certain Beneficial Owners and Management	13

Item 13.	Certain Relationships and Related Transactions	13

Item 14.	Controls and Procedures	13

PART IV

Item 15.	Exhibits, Financial Statement Schedule and Reports on Form 8-K	14

Signatures		15

PART I

This Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 concerning our current expectations, assumptions, estimates and projections about the future. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those indicated in the forward-looking statements. For a discussion of risks and uncertainties that may affect CarMax’s business, see “Cautionary Information about Forward-Looking Statements” on page 27 of the company’s 2003 Annual Report to Shareholders, which is attached to this Form 10-K as Exhibit 13.1.

Item 1. Business

CarMax, Inc. was incorporated under the laws of the Commonwealth of Virginia in 1996. Its corporate headquarters is located at 4900 Cox Road, Glen Allen, Va. CarMax, Inc. is a holding company and its operations are conducted through its subsidiaries. The company has retail operations consisting of used and new car retail sales and vehicle repair businesses. The company has a finance operation that provides prime-rated automobile installment loans.

In this document, “the company,” “we,” “our” and “CarMax” refer to CarMax, Inc. and subsidiaries.

The company’s Web site address is www.carmax.com. The company makes available, free of charge through its Web site, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after filing the material or furnishing it to the Securities and Exchange Commission.

General. CarMax is the nation’s largest specialty retailer of used cars and light trucks. In 1993, CarMax pioneered the used car superstore concept when it opened its first location in Richmond, Virginia. CarMax purchases, reconditions and sells used vehicles. In addition, CarMax sells new vehicles under franchise agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors. CarMax provides its customers the opportunity to shop for vehicles the same way they shop for items at other “big-box” retailers by offering a broad selection of great quality vehicles at low, no-haggle prices in a customer-friendly atmosphere. CarMax has separated the practice of trading in a used vehicle in conjunction with the purchase of another vehicle into two distinct and independent transactions. CarMax provides an appraisal that allows current vehicle owners to sell their cars to CarMax regardless of their intent to purchase a vehicle from the company. CarMax also provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation and third-party lenders, the sale of extended warranties and vehicle repair service.

Store Formats. CarMax conducts its operations in three basic retail formats. Currently, our growth plan calls for the construction of standard superstores and satellite superstores. Existing standard superstores are approximately 40,000 to 60,000 square feet on 10 to 25 acres with approximately 20 to 35 service bays. Existing satellite superstores are approximately 10,000 to 20,000 square feet on 4 to 7 acres with approximately 3 to 9 service bays. Existing mega superstores are approximately 70,000 to 95,000 square feet on 20 to 35 acres with approximately 35 to 45 service bays.

Expansion. CarMax has established a strong foundation for future growth based upon its unique knowledge of the used car market, its established presence in key locations and its ability to execute its business plan in a market subject to continuous change. Over the last five years, CarMax has refined its operating strategies and has emerged as the nation’s leading specialty retailer of used cars and light trucks in the United States. CarMax believes that it is well-positioned to succeed in the highly competitive automotive retail industry. Specifically, CarMax has enhanced its ability to identify profitable markets, determine the appropriate store formats to fit those markets and effectively manage pricing and inventory mix.

Since 1997, CarMax has modified and re-established its new-store growth model to move away from large-format mega superstores. Despite the success of its initial mega superstores in Norcross, Ga., and Laurel, Md., in its subsequent stores in the Los Angeles, Miami, Tampa, Houston, Dallas and Chicago markets, this format proved less effective from a profitability perspective. CarMax found that customers in these metropolitan markets were not as willing to travel great distances to its mega superstores, resulting in stores that were too large and that underserved the trade area. Consequently, CarMax is expanding its number of stores by adding standard superstores in new, mid-sized markets that can be served effectively with one CarMax

superstore, together with satellite superstores in existing multi-store markets. In addition, based upon the initial success of our test of adding a satellite store in a fully developed, mid-sized market in Charlotte, N.C., CarMax intends to expand testing whether increased penetration may be achieved by adding a satellite superstore in additional mid-size markets. CarMax believes that by focusing on mid-sized markets and satellite fill-in superstores over the near term, it can achieve a higher return on its investment with lower risk. This approach also allows CarMax to postpone entering large multi-store markets until its hub-and-satellite fill-in store strategy in existing large multi-store markets has matured further and provides CarMax the opportunity to better anticipate the number, location and types of stores that will be required in such markets.

Under the hub-and-satellite fill-in store strategy, a satellite superstore uses the reconditioning, purchasing management and business office operations of a nearby full-sized hub superstore. The consumer offer is identical in both hub superstores and satellite superstores. These hub stores have service facilities that provide regular maintenance and warranty service typical of most new car dealerships and also recondition all used vehicles prior to sale at both the hub superstore and any related satellite superstore.

During fiscal 2003, CarMax opened a total of five superstores. In addition to one standard-sized superstore originally planned in fiscal 2003 but opened in March 2003, CarMax plans to open approximately four standard-sized used car superstores and three prototype satellite superstores in fiscal 2004. CarMax may also open an eighth store in the fourth quarter. In April of fiscal 2004, CarMax sold its Jeep franchise in Kenosha, Wis. Also, in fiscal 2004, CarMax plans to sell its five Mitsubishi new car franchises. The sale of the Mitsubishi franchises, which are integrated with used car superstores, will create more space for used car sales expansion, which is more profitable for the company. In addition, in Los Angeles the company intends to integrate the two remaining stand-alone new car franchises with a used car superstore during the second half of fiscal 2004.

CarMax expects mid-sized markets to provide much of its future growth in the next few years. CarMax has defined “mid-sized market” as a market with a television-viewing population of approximately 1.0 to 2.5 million people. CarMax is currently in twelve mid-sized markets including Richmond, Raleigh, Charlotte, Orlando, San Antonio, Greenville (S.C.), Nashville, Greensboro, Knoxville, Sacramento, Las Vegas and Kansas City. CarMax believes that more than 30 additional mid-sized markets may be suitable for its standard store prototype. CarMax believes that focusing on mid-sized markets enhances its sales growth and profitability. Site selection and real estate acquisition typically are simpler in mid-sized markets. Establishing consumer awareness also is easier in a mid-sized market because all forms of media can be used economically to achieve broad consumer reach. As a result, CarMax’s stores in mid-sized markets generally exceed the company’s average return on investment.

In addition to entering new mid-sized markets, CarMax plans to focus on adding satellite fill-in superstores in underserved trade areas in its existing multi-store markets, which include Washington/Baltimore, Chicago, Atlanta, Dallas, Houston, Miami and Tampa. CarMax has identified approximately 10 underserved trade areas to target in these markets. CarMax is focusing on the addition of satellite fill-in superstores in existing markets because: satellite superstores leverage existing facilities and management in those markets; satellite superstores present the same consumer offer, including size of inventory, on one-half to one-third the acreage of a standard superstore; and satellite superstores require little or no incremental advertising. The four prototype satellite superstores opened in multi-store markets for more than twelve months, located in Rockville, Md.; Plano, Tex.; Houston, Tex.; and Merrillville, Ind. (Chicago market), were profitable in their first year.

CarMax expects that its business strategies will help it improve its sales growth and enhance its profit margins.

Merchandising. CarMax offers its customers a broad selection of makes and models of used vehicles, including both domestic and imported cars and light trucks, at competitive prices. CarMax’s used car selection covers popular brands from manufacturers such as DaimlerChrysler, Ford, General Motors, Honda, Mitsubishi, Nissan and Toyota and specialty brands like BMW and Lexus. To appeal to the vast array of consumer preferences and budgets, CarMax offers used vehicles under two programs – the CarMax program and the ValuMax program. CarMax used cars are less than six years old, have fewer than 60,000 miles and generally range in price from $9,000 to $28,000. Each CarMax vehicle must pass a comprehensive quality inspection that covers all major and minor mechanical systems and all safety functions as well as cosmetic criteria. ValuMax used cars are more than six years old or have 60,000 miles or more and generally range in price from $6,000 to $16,000. Each ValuMax vehicle must pass a quality inspection covering the major mechanical systems and all safety functions. For ValuMax, concentration is placed on providing good, basic, mechanically sound transportation. Cosmetic corrections or repairs of convenience or luxury items, such as electric mirrors or electric antennas, may not be made.

At all new car locations, a full selection of the manufacturer’s models related to the franchise is available. CarMax operates new car dealerships under separate franchise or dealer agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors.

CarMax has implemented an everyday low-price strategy under which CarMax sets “no-haggle” prices on its used and new vehicles. In fiscal 2003, its retail used car prices were, on average, $1,500 below retail Kelley Blue Book price. CarMax believes most prices are at or below the best negotiated price in the market. Prices on all vehicles are clearly displayed on each vehicle’s information sticker, on carmax.com and in CarMax’s newspaper advertising. CarMax has extended its no-haggle philosophy to

every stage of the vehicle transaction, including trade-ins, financing rates, accessories, extended warranty pricing and its low vehicle documentation fees.

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

CarMax has replaced the traditional “trade-in” transaction with a process in which CarMax trained buyers appraise any vehicle, usually in 30 minutes or less, and provide the vehicle’s owner with a written, guaranteed cash offer that is good for seven days or 300 miles. An appraisal is available to everyone free of charge, whether or not the individual is purchasing a vehicle from CarMax. In contrast to traditional dealers who seek to combine the vehicle purchase and trade-in transactions, the CarMax sales process enables the customer to separately evaluate and make an informed decision with respect to each transaction. Also, CarMax believes that this process enables it to access the private market as a significant additional source for used vehicles. In addition, many vehicles purchased directly from consumers are among the highest quality used vehicles available in the market because they have been maintained by their owners. Because CarMax’s operating strategy is to build customer confidence and satisfaction by offering only high quality vehicles, fewer than half of the vehicles acquired through the appraisal process meet the CarMax retail standard. Those vehicles that do not meet the standards are sold at the company’s on-site wholesale auctions.

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

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

New car inventory for the franchise locations is governed by the terms of the sales and service agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors. For further discussion regarding these agreements see “Franchises.” on page 7 of this Form 10-K.

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

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

During fiscal 2003 CarMax introduced the Electronic Repair Order system, or “ERO,” which drives the sequencing of reconditioning procedures. CarMax expects ERO to reduce cycle time, provide information that will help increase quality and reduce costs, further enhancing service and profitability.

Service. All CarMax used car locations provide vehicle repair service, including used car warranty service. Factory-authorized service is also provided at all new car franchises. In fiscal 2001, CarMax expanded its retail service operations as its customer base increased. In fiscal 2002 and 2003, CarMax continued its retail service expansion through additional marketing and growth in its customer base. CarMax has developed systems and procedures that are intended to ensure that its retail repair service operations are conducted in the same customer-friendly and efficient manner as its other operations. Also in fiscal 2003, CarMax implemented the ERO system, which will provide a foundation for further retail service expansion.

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

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

Extended Warranty Sales. At the time CarMax sells a vehicle, it offers to sell to the customer an extended warranty. Currently, in all the states in which CarMax operates, it sells warranties on behalf of unrelated third parties who are the primary obligors. Under these third-party warranty programs, CarMax has no contractual liability. Contracts usually have terms of coverage between 12 and 72 months. CarMax offers these extended warranties at low, fixed prices. All extended warranties CarMax sells (other than manufacturers’ warranties) have been designed to its specifications and are administered by a third party, through a private-label arrangement under which CarMax receives a fee from the administrator at the time the extended warranty is sold. CarMax offers extended warranties on CarMax program vehicles and power train extended warranties on ValuMax program vehicles.

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

Marketing and Advertising. CarMax’s marketing strategies are focused on developing awareness of the advantages of shopping at CarMax, attracting customers who are already in the market to purchase a vehicle and targeting specific segments of the market through special promotions. CarMax’s marketing strategies are implemented primarily through newspaper, television and radio advertising, and carmax.com. Television and radio broadcast advertisements are designed to enhance consumer awareness of the CarMax name, carmax.com and key components of the CarMax offer. Newspaper advertisements promote CarMax’s broad selection of vehicles and price leadership, targeting consumers with immediate purchase intentions. Both broadcast and newspaper advertisements are designed to drive customers to its stores and to the CarMax Web site. The style and substance of CarMax’s advertisements are distinctly different from those placed by most automobile dealers. The third major marketing support for CarMax is its Web site, carmax.com, which acts as a marketing tool for communicating its consumer offer in detail, a sophisticated search engine for finding the right vehicle and a sales channel for customers who prefer to complete a part of the shopping and sales process online with one of CarMax’s Internet sales consultants.

In fiscal 2001, CarMax further refined its advertising approach by eliminating spending that its research showed to be unprofitable and by increasing the efficiency of its television advertising. In fiscal 2002 and 2003, CarMax continued to refine its advertising approach implemented in fiscal 2001. CarMax employs a targeted, high frequency, low-cost-per-impression television strategy, coupled with more targeted newspaper advertising. Advertising expenditures were 1.3% of net sales and operating revenues in both fiscal 2003 and fiscal 2002 and 1.6% of net sales and operating revenues in fiscal 2001. CarMax’s fiscal 2003, 2002 and 2001 advertising expense ratios reflect leverage from the total and comparable store sales increases and changes in media buying strategy.

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

CarMax utilizes market awareness and customer satisfaction surveys to help tailor its marketing efforts to the purchasing habits and preferences of customers in each market area. In multi-store markets, CarMax expects to leverage its advertising expense.

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

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

Competition. The used and new car retail business is highly competitive. Consumers typically have many choices when deciding where to purchase a used or new vehicle. In both the used and new vehicle markets, CarMax seeks to distinguish itself from traditional dealerships through its consumer offer, sales approach and other innovative operating strategies. The company’s largest competition is franchised new dealerships, which sell the majority of late model used vehicles. CarMax also competes with independent dealers, rental companies and private parties.

CarMax believes that the principal competitive factors in used vehicle sales are price; ability to offer a wide selection of vehicles, including the more popular makes and models; quality of the vehicles; location of retail sites; and degree of customer satisfaction with the car-buying experience. Other competitive factors include the ability to offer or arrange customer financing on competitive terms and the quality and cost of primary and extended warranties. CarMax believes that it is competitive in all of these areas and enjoys advantages over competitors that employ traditional selling methods.

In the new vehicle market, CarMax competes with other franchised dealers offering vehicles produced by the same or other manufacturers and with auto brokers and leasing companies. CarMax believes that the principal competitive factors in new vehicle sales are price; dealer sales promotions; ability of dealerships to offer a wide selection of the most popular vehicles; location of retail sites; and quality of customer service. The new vehicle market has historically been served primarily by dealerships employing traditional high-pressure, negotiation-oriented sales techniques. CarMax believes that its customer-friendly, low-pressure sales methods produce points of competitive differentiation in which it may have an advantage. However, because the new car business does not provide the opportunity to add as much value as the used car business, the company is reducing the number of new car franchises it operates.

Customer Satisfaction. The CarMax process is designed to enable customers to evaluate separately each step of the sales process a la carte and to make informed decisions at each step based on comprehensive information about their options and the associated prices. The customer can take or leave any aspect of the offer without impacting the offer on the other steps in the sales process. To increase efficiency, the same sales consultant and the customer-friendly, proprietary CarMax inventory information system are available to assist the customer throughout the CarMax sales process. CarMax designed the elements of the CarMax offer to create a customer-friendly experience. CarMax’s no-haggle pricing allows its sales consultants to focus solely on its customers’ needs. The entire purchase process, including a test-drive and financing, can be completed in less than one hour. CarMax conducts extensive market research to measure its customer service record and to refine its consumer offer.

CarMax’s sales consultants play a significant role in ensuring a customer-friendly sales process. CarMax places great emphasis on integrity and customer-relations skills in its hiring policies and training programs. Although few of CarMax’s sales consultants have had prior experience in automobile sales, most of CarMax’s sales consultants have had prior retail experience outside the auto business before joining CarMax. Sales consultants, including both full- and part-time employees, are compensated on a commission basis. The sales consultants’ incentives are aligned with the customer’s interests. A sales consultant is paid the same fixed dollar commission on any vehicle sold, so the sales consultants’ only objective is helping customers find the vehicles they want at a price they can afford. In contrast, sales and finance personnel at traditional dealerships often receive higher commissions for negotiating higher prices and for steering customers toward vehicles with higher gross margins.

Customer satisfaction is also driven by the quality of the used cars sold and the services the company provides. CarMax’s Certified Quality Inspection assures that every car offered for sale at CarMax meets rigorous mechanical, electrical and safety standards. CarMax backs every car with a five-day or 250-mile, “no-questions-asked” money-back guarantee and an industry-leading 30-day limited warranty.

Training. CarMax is committed to providing exceptional training to its associates. New store associates are offered structured, self-paced training programs that introduce them to company policies and their specific job responsibilities. Associate participation and performance in each training program are measured by an intranet-based testing and tracking system. Most new associates are assigned mentors who provide on-the-job guidance and support. Many of CarMax’s compensation programs reward associates for continuously improving their skills.

CarMax also offers comprehensive, facilitated classroom training courses to sales consultants, buyers, automotive technicians and managers. All sales consultants receive extensive customer service training both initially and on an ongoing basis. Each buyer undergoes a 12- to 24-month apprenticeship under the tutelage of an experienced buyer and appraises thousands of cars before making his or her first independent purchase. More than 60% of CarMax’s service technicians are A.S.E.-certified, the industry standard for technician training.

Customer Credit. CarMax provides financing for prime-rated customers through its own finance operation, CarMax Auto Finance (“CAF”), or through Bank of America. In some cases where the used vehicle is a certified used vehicle, the manufacturer

may also provide prime-rated customers an offer. Offering customers a third-party alternative for prime loans enhances the CarMax consumer offer and helps to ensure that CAF remains competitive. In addition, Chrysler Financial, Ford Motor Credit, General Motors Acceptance, Mitsubishi Motors Credit, Nissan Motors Acceptance and Toyota Motors Financial Services offer prime financing to customers purchasing new vehicles at applicable CarMax locations. Financing for non-prime rated customers is offered by TransSouth Financial, Wells Fargo Financial Acceptance and AmeriCredit Financial Services, with no financial recourse to CarMax. Sales consultants use CarMax’s proprietary information system to electronically submit financing applications and receive responses from multiple lenders, generally in less than five minutes from prime lenders. Financings are installment sale contracts secured by the vehicles financed. Customers are permitted to refinance their loans within three days of a purchase without incurring any finance or related charges. CarMax’s arrangements with third-party lenders provide for payment of a fee to CarMax at the time of financing, provided the loan is not refinanced within 90 days. CarMax has no recourse liability on loans arranged with third-party lenders.

CAF generates income from the financing CarMax provides to prime-rated customers through the sale and servicing of the contract receivables originated by CarMax. Because the purchase of an automobile traditionally is reliant on the consumer’s ability to obtain on-the-spot financing, it is important to our business that such financing be available to credit-worthy customers. While this financing can also be obtained from third-party sources, CarMax is concerned that total reliance on third parties can create an unacceptable volatility and business risk. Furthermore, the company believes that its processes and systems, the transparency of pricing and vehicle quality provide a unique and ideal environment in which to procure high-quality auto loan receivables, both for CAF and for third-party lenders. CarMax believes that the high quality of its used vehicles as well as the broad scope of the extended warranties CarMax sells to more than half its customers reduces default rates on its customers’ loans by helping to keep the purchased vehicles operational. CAF provides CarMax with the opportunity to capture additional profits and cash flows from auto loan receivables while managing the company’s reliance on third-party finance sources. Receivables generated by the finance operation are financed through asset securitization programs.

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

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

E-Commerce. The CarMax Web site, carmax.com, offers complete inventory and pricing search capabilities. Information on the more than 15,000 cars available in the CarMax nationwide inventory is updated daily. Carmax.com includes all the detailed vehicle information, such as pictures of each vehicle, prices, features, specifications, and store locations, available at the store as well as sorting and comparison features that allow consumers to easily compare vehicles. The site also includes features such as detailed vehicle reviews, payment calculators and an option to estimate trade-in values via a link with Kelley Blue Book. CarMax believes these features make it easier for consumers to meet all of their auto research needs on carmax.com. Both used car and new car customers can contact dedicated Internet sales consultants online via carmax.com, by telephone or by fax. Customers can work with these sales consultants from the comfort of home - including applying for financing - and need only visit the store to sign the paperwork and pick up their vehicle.

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

Employees. On April 30, 2003, CarMax had 6,310 hourly and salaried associates and 2,446 sales associates who worked on a commission basis. No CarMax employee is subject to a collective bargaining agreement. Additional CarMax personnel are employed during peak selling seasons. At April 30, 2003, CarMax’s 44 general managers averaged five years of CarMax experience and more than eight years of prior management experience.

Governmental and Environmental Regulation. CarMax is subject to a wide range of federal, state and local laws and regulations. These laws regulate, among other things, the manner in which CarMax conducts business, including advertising,

sales, consumer lending practices, local licensing requirements and consumer protection laws. CarMax’s business also involves the use, handling and disposal of hazardous or toxic substances, including motor oil, gasoline, transmission fluid, solvents, lubricants and other materials. The business also involves the past and current operation and/or removal of aboveground and underground storage tanks containing such substances. Accordingly, CarMax is subject to U.S. federal, state and local laws and regulations governing air and water quality and the handling, storage and disposal of hazardous or toxic substances. CarMax believes that it does not have any material governmental or environmental liabilities and that compliance with such laws and regulations will not, individually or in the aggregate, have a material adverse effect on its results of operations or financial condition.

Item 2. Properties

CarMax’s operations were conducted in 46 retail stores as of April 30, 2003. The following table summarizes its retail stores as of April 30, 2003:

	Mega	Standard	Prototype Satellite	Co-Located New Car Stores	Stand-alone New Car Stores	Total
California	1	1	—	—	2	4
Florida	3	3	—	—	—	6
Georgia	1	2	1	—	—	4
Illinois	3	1	1	—	—	5
Indiana	—	—	1	—	—	1
Kansas	—	1	—	—	—	1
Maryland	1	1	1	1	—	4
Nevada	—	1	—	—	—	1
North Carolina	—	3	1	—	—	4
South Carolina	—	1	—	—	—	1
Tennessee	—	2	—	—	—	2
Texas	4	3	2	—	—	9
Virginia	—	2	—	—	—	2
Wisconsin	—	—	1	1	—	2

Total	13	21	8	2	2	46

As of April 30, 2003, CarMax owns its newest superstores located in Oak Lawn, Ill.; Pineville (Charlotte), N.C.; Knoxville, Tenn.; Lithia Springs (Atlanta), Ga.; Henderson (Las Vegas), Nev.; and Merriam (Kansas City), Kan. The remaining CarMax stores are leased. CarMax also leases its headquarters, which is located in suburban Richmond, Virginia, near the site of the first CarMax retail store.

CarMax currently operates 23 of its sales locations pursuant to various leases under which its former parent Circuit City Stores, Inc. was the original tenant and primary obligor. Circuit City Stores and not CarMax had originally entered into these leases so that CarMax could take advantage of the favorable economic terms available to Circuit City Stores as a large retailer. Circuit City Stores has assigned each of these leases to CarMax. Despite the assignment and pursuant to the terms of the leases, Circuit City Stores remains contingently liable under the leases. In recognition of this ongoing contingent liability, CarMax made a one-time special dividend payment of $28.4 million to Circuit City Stores on October 1, 2002, the separation date.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended February 28, 2003.

Executive Officers of the Company

The following table identifies the executive officers of the company. The company is not aware of any family relationship between any executive officers of the company or any executive officer and any director of the company. All executive officers are generally elected annually and serve for one year or until their successors are elected and qualify. The next general election of officers will occur in June 2003.

Name	Age	Office
Austin Ligon	52	President, Chief Executive Officer and Director
Thomas J. Folliard	38	Executive Vice President, Store Operations
Keith D. Browning	50	Executive Vice President, Chief Financial Officer and Director
Michael K. Dolan	54	Senior Vice President, Chief Information Officer
Joseph S. Kunkel	40	Senior Vice President, Marketing and Strategy
Stuart A. Heaton	47	Vice President, General Counsel and Corporate Secretary

Mr. Ligon is a co-founder of CarMax, Inc. and has been integrally involved in the leadership of the business since its inception. He has been president of CarMax since 1995 and chief executive officer since the separation of the company from its former parent Circuit City Stores, Inc. on October 1, 2002. He was appointed senior vice president of corporate planning at Circuit City Stores, Inc. in 1991 and became senior vice president-automotive of Circuit City Stores, Inc. and president of CarMax, Inc. in 1995. He was senior vice president of strategic planning for Marriott Hotels and Resorts prior to joining Circuit City Stores, Inc. in 1990. Mr. Ligon has served as a director of CarMax since January of 1997.

Mr. Folliard joined CarMax in 1993 as senior buyer and became director of purchasing in 1994. Mr. Folliard was promoted to vice president of merchandising of CarMax in 1996, senior vice president of store operations in July 2000, and executive vice president of store operations in April 2001. He was responsible for the design and development of the unique CarMax purchasing process, the buyer in training program and in-store wholesale auction system.

Mr. Browning joined CarMax in 1996 after spending 14 years at Circuit City Stores, Inc. He has been involved in the development of accounting procedures, systems and internal controls for CarMax since its inception. While at Circuit City Stores, Inc., he served as controller for the West Coast Division from 1984 to 1987, assistant controller from 1987 to 1990, corporate controller from 1990 to 1996, and vice president from 1992 to 1996. Mr. Browning has served as a director of CarMax since January 1997.

Mr. Dolan joined CarMax in 1997 as vice president and chief information officer. Mr. Dolan was named senior vice president in April 2001. Mr. Dolan had prior executive experience in information systems with H.E.B. Stores, a privately held grocery retailer, where he was vice president and chief information officer.

Mr. Kunkel joined CarMax in 1998 as vice president, marketing and strategy. Mr. Kunkel was named senior vice president in April 2001. Prior to joining CarMax, Mr. Kunkel was president of Wholesome Kidfoods, Inc. and a senior manager with McKinsey and Company.

Mr. Heaton joined CarMax in 2002 as vice president, general counsel and corporate secretary. Prior to joining CarMax, Mr. Heaton was assistant general counsel with Lockheed Martin Corporation from 1997 to 2002, where he provided legal support for the information systems/telecommunications business area.

Part II

With the exception of the information incorporated by reference from the 2003 Annual Report to Shareholders in Items 5, 6, 7, 7A and 8 of Part II and Item 16 of Part IV of this Form 10-K, the company’s 2003 Annual Report to Shareholders is not to be deemed filed as a part of this report.

Item 5. Market for the Company’s Common Equity and Related Stockholder Matters

Incorporated by reference is the information appearing under the heading “Common Stock” on page 27 of the company’s 2003 Annual Report to Shareholders.

As of April 30, 2003, there were 8,206 shareholders of record of CarMax common stock.

Item 6. Selected Financial Data

Incorporated by reference is the information appearing under the heading “Selected Financial Data” on page 16 of the company’s 2003 Annual Report to Shareholders.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Incorporated by reference is the information appearing under the heading “Management’s Discussion and Analysis” on pages 17 through 27 of the company’s 2003 Annual Report to Shareholders.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Incorporated by reference is the information appearing under the sub-heading “Market Risk” and “Cautionary Information about Forward Looking Statements” on pages 26 and 27 of the company’s 2003 Annual Report to Shareholders.

Item 8. Consolidated Financial Statements and Supplementary Data

Incorporated by reference is the information appearing under the headings “Consolidated Statements of Earnings,” “Consolidated Balance Sheets,” “Consolidated Statements of Cash Flows,” “Consolidated Statements of Stockholders’ Equity,” “Notes to Consolidated Financial Statements,” and “Independent Auditors’ Report,” on pages 28 through 46 of the company’s 2003 Annual Report to Shareholders.

Incorporated by reference is the information appearing under the heading “Selected Quarterly Financial Data (Unaudited)” on page 45 of the company’s 2003 Annual Report to Shareholders.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Part III

With the exception of the information incorporated by reference from the company’s Proxy Statement in Items 10, 11, 12, 13 and 15 of Part III of this Form 10-K, the company’s Proxy Statement dated May 15, 2003, is not to be deemed filed as a part of this report.

Item 10. Directors and Executive Officers of the Company

The information concerning the company’s directors required by this Item is incorporated by reference to the section entitled “Election of Directors” appearing on pages 4 and 5 of the company’s Proxy Statement dated May 15, 2003.

The information concerning the company’s executive officers required by this Item is incorporated by reference to the section in Part I hereof entitled “Executive Officers of the Company” appearing on page 11 of this form 10-K.

The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” appearing on page 20 of the company’s Proxy Statement dated May 15, 2003.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference to the sections entitled “Compensation and Personnel Committee Report” and “Executive Compensation” (excluding the information under the heading “8-Year History of Options”) appearing on pages 14 through 19 of the company’s Proxy Statement dated May 15, 2003.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated by reference to the section entitled “Share Ownership Table” appearing on pages 10 and 11 of the company’s Proxy Statement dated May 15, 2003.

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about CarMax, Inc. common stock that may be issued upon the exercise of options and rights under all existing equity compensation plans as of February 28, 2003.

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category	(a)		(b)			(c)
Equity compensation plans approved by security holders	4,345,630		$	10.25		5,687,341	(1)
Equity compensation plans not approved by security holders (2)	23,064	(3)	$	14.77	(4)	903,509

Total	4,368,694					6,590,850

(1)

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

(2)

Under the 2002 CarMax, Inc. Employee Stock Purchase Plan for CarMax, Inc. Employees, most employees who have been employed for one year can participate. Executives are excluded. A participating employee may authorize payroll deductions of 2% to 10% of compensation, up to an annual maximum of $7,500. Once each month, the payroll deductions are used to purchase CarMax, Inc. common stock. The purchase price is either the average cost of all shares purchased for a particular month on the open market or the closing price of the stock on the New York Stock Exchange on the last business day of the month when the shares are purchased from CarMax, Inc. To encourage participation, the employer matches 15% of the employee’s contribution. An eligible employee may change, cease or restart contributions for any payroll period without any penalty. The employer pays all costs of the plan.

(3)

Shares purchased for February 2003.

(4)

Purchase price per share for shares purchased for February 2003.

Item 13. Certain Relationships and Related Transactions

The information required by this Item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” appearing on page 9 of the company’s Proxy Statement dated May 15, 2003.

Item 14. Controls and Procedures

The company maintains disclosure controls and procedures (“disclosure controls”) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as the Annual Report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to our management, including the chief executive officer (“CEO”) and chief financial officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Within 90 days of the date of filing the 10-K, the company evaluated the effectiveness of the design and operation of its disclosure controls. This evaluation was performed under the supervision and with the participation of management, including our CEO and CFO. Based upon that evaluation, the CEO and CFO concluded that the company’s disclosure controls are effective. From the date of the evaluation to the date of this Form 10-K, there have been no significant changes in internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Part IV

Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K

(a) The following documents are filed as part of this Report:

Financial Statements. The following Financial Statements of CarMax, Inc. and subsidiaries and the related Notes to Financial Statements and the Independent Auditors’ Report are incorporated by reference to pages 28 through 46 of the company’s 2003 Annual Report to Shareholders:

(a)

Consolidated Statements of Earnings for the fiscal years ended February 28, 2003, 2002 and 2001

(b)

Consolidated Balance Sheets at February 28, 2003 and 2002

(c)

Consolidated Statements of Cash Flows for the fiscal years ended February 28, 2003, 2002 and 2001

(d)

Consolidated Statements of Stockholders’ Equity for the fiscal years ended February 28, 2003, 2002 and 2001

(e)

Notes to Consolidated Financial Statements

(f)

Independent Auditors’ Report

Financial Statement Schedule. “Schedule II – Valuation and Qualifying Accounts and Reserves,” as well as the accompanying Independent Auditors’ Report on CarMax, Inc. Financial Statement Schedule for the fiscal years ended February 28, 2003, 2002 and 2001, are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of CarMax, Inc. and Notes thereto.

Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements and Notes thereto.

Exhibits. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this report.

(b) Reports on Form 8-K

The company did not file any reports on Form 8-K during the fourth quarter of the fiscal year ended February 28, 2003.

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.

CARMAX, INC.

By:	/s/ AUSTIN LIGON	By:	/s/ KEITH D. BROWNING
	Austin Ligon President and Chief Executive Officer May 29, 2003		Keith D. Browning Executive Vice President and Chief Financial Officer May 29, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

/s/ KEITH D. BROWNING

/s/ HUGH G. ROBINSON*

Keith D. Browning

Executive Vice President, Chief Financial Officer and Director

May 29, 2003

Hugh G. Robinson

Director

May 29, 2003

/s/ JEFFREY E. GARTEN*

/s/ RICHARD L. SHARP *

Jeffrey E. Garten

Director

May 29, 2003

Richard L. Sharp

Director

May 29, 2003

/s/ W. ROBERT GRAFTON *

/s/ BETH A. STEWART*

W. Robert Grafton

Director

May 29, 2003

Beth A. Stewart

Director

May 29, 2003

/s/ WILLIAM S. KELLOGG *

/s/ WILLIAM R. TIEFEL*

William S. Kellogg

Director

May 29, 2003

William R. Tiefel

Director

May 29, 2003

/s/ AUSTIN LIGON

Austin Ligon

President, Chief Executive Officer and Director

May 29, 2003

*By:

/s/ AUSTIN LIGON

Austin Ligon

Attorney-In-Fact

The original powers of attorney authorizing Austin Ligon and Keith D. Browning, or either of them, to sign this annual report on behalf of certain directors and officers of the company are included as Exhibit 24.1.

Certification

I, Austin Ligon, certify that:

I have reviewed this Form 10-K of CarMax, Inc.;

Based on my knowledge, this Form 10-K does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Form 10-K;

Based on my knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 29, 2003

By:

/s/ AUSTIN LIGON

Austin Ligon

President and Chief Executive Officer

Certification

I, Keith D. Browning, certify that:

I have reviewed this Form 10-K of CarMax, Inc.;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 29, 2003

By:

/s/ KEITH D. BROWNING

Keith D. Browning

Executive Vice President and Chief Financial Officer

Schedule II

CARMAX, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts and Reserves

(Amounts in thousands)

Description	Balance at Beginning of Year		Charged to Income		Charge-offs less Recoveries			Balance at End of Year
Year ended February 28, 2001:
Allowance for doubtful accounts	$	5,818	$	3,707	$	(2,621	)	$	6,904
Year ended February 28, 2002:
Allowance for doubtful accounts	$	6,904	$	2,067	$	(4,884	)	$	4,087
Year ended February 28, 2003:
Allowance for doubtful accounts	$	4,087	$	733	$	(2,730	)	$	2,090

Independent Auditors’ Report

To the Board of Directors and Stockholders

CarMax, Inc.:

Under the date March 31, 2003, we reported on the consolidated balance sheets of CarMax, Inc. and subsidiaries (the company) as of February 28, 2003 and 2002, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the years in the three-year period ended February 28, 2003, as incorporated by reference herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related CarMax, Inc. financial statement schedule (Schedule II) as listed in Item 15(a) 2 of this Form 10-K. This financial statement schedule is the responsibility of the company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.

In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Richmond, Virginia

March 31, 2003

INDEX TO EXHIBITS


2.1		Separation Agreement, dated May 21, 2002, between Circuit City Stores, Inc. and CarMax, Inc., filed as Exhibit 2.1 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.

3.1		CarMax, Inc. Amended and Restated Articles of Incorporation, effective June 6, 2002, filed as Exhibit 3.1 to CarMax’s Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), are incorporated by this reference.

3.2		CarMax, Inc. Articles of Amendment to the Amended and Restated Articles of Incorporation, effective June 6, 2002, filed as Exhibit 3.2 to CarMax’s Current Report on Form 8-K, filed on October 3, 2002 (File No. 1-31420), are incorporated by this reference.

3.3		CarMax, Inc. Bylaws, as amended and restated March 25, 2003, filed herewith.

4.1		Rights Agreement, dated as of May 21, 2002, between CarMax, Inc. and Wells Fargo Bank Minnesota, N.A., as Rights Agent, filed as Exhibit 4.1 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.

10.1		Employment Agreement, effective March 1, 2002, between Circuit City Stores, Inc. (assigned to CarMax, Inc. in connection with the separation) and Austin Ligon, filed as Exhibit 10.4 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.*

10.2		Form of Employment Agreement between CarMax Auto Superstores, Inc. and certain executive officers, including Thomas J. Folliard, Keith D. Browning, Michael K. Dolan and Joseph S. Kunkel, filed as Exhibit 10.4 to CarMax’s Registration Statement on Form S-4/A, filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.*

10.3		CarMax, Inc. Benefit Restoration Plan, filed as Exhibit 10.6 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.*

10.4		CarMax, Inc. 2002 Non-Employee Directors Stock Incentive Plan, filed as Exhibit 10.7 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.*

10.5		CarMax, Inc. 2002 Stock Incentive Plan, filed as Exhibit 10.8 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.*

10.6		CarMax, Inc. Annual Performance-Based Bonus Plan filed as Exhibit 10.9 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.*

10.7		CarMax, Inc. 2002 Employee Stock Purchase Plan, filed herewith.*

10.8		Amended and Restated Credit Agreement, dated as of February 10, 2003, among CarMax Auto Superstores, Inc., CarMax, Inc., Various Financial Institutions and DaimlerChrysler Services North America LLC, filed herewith. Certain non-material schedules and exhibits have been omitted from the agreement as filed. CarMax agrees to furnish supplementally to the Commission upon request a copy of such schedules and exhibits.**

10.9		Amendment No. 1 to Amended and Restated Credit Agreement, dated as of April 24, 2003, among CarMax Auto Superstores, Inc., CarMax, Inc., DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, filed herewith.

10.10		Amended and Restated Security Agreement, dated as of February 10, 2003, among CarMax Auto Superstores, Inc., various other debtors and DaimlerChrysler Services North America LLC, filed herewith.

10.11		Guaranty, dated May 17, 2002, executed by certain CarMax, Inc. subsidiaries in favor of DaimlerChrysler Services North America LLC, filed as Exhibit 10.13 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.

10.12		Form of the Employee Benefits Agreement filed as Exhibit 10.3 to CarMax’s Registration Statement on Form S-4/A filed August 5, 2002 (File No. 333-85240), is incorporated by this reference.*

13.1		CarMax’s Annual Report to Shareholders for the fiscal year ended February 28, 2003, pages 16-46.


21.1		CarMax, Inc. Subsidiaries

23.1		Consent of KPMG LLP

24.1		Powers of Attorney

99.1		Section 906 Certification

Indicates management contracts, compensatory plans or arrangements of the company required to be filed as an exhibit.

Portions of this exhibit have been omitted and filed separately with the SEC pursuant to the company’s application for confidential treatment of omitted information pursuant to Rule 24b-A of the Exchange Act.

EX-3.3 3 dex33.htm CARMAX, INC. BYLAWS CarMax, Inc. Bylaws

Exhibit 3.3

CARMAX, INC.

BYLAWS

AS AMENDED AND RESTATED

March 25, 2003

TABLE OF CONTENTS

ARTICLE I MEETINGS OF SHAREHOLDERS		3
1.1	Place and Time of Meetings	3
1.2	Organization and Order of Business	3
1.3	Annual Meeting	3
1.4	Special Meetings	4
1.5	Record Dates	4
1.6	Notice of Meetings	4
1.7	Waiver of Notice; Attendance at Meeting	5
1.8	Quorum and Voting Requirements	5
1.9	Proxies	5
1.10	Voting List	5
ARTICLE II DIRECTORS		6
2.1	General Powers	6
2.2	Number and Term	6
2.3	Nomination of Directors	6
2.4	Election	6
2.5	Removal; Vacancies	6
2.6	Annual and Regular Meetings	7
2.7	Special Meetings	7
2.8	Notice of Meetings	7
2.9	Waiver of Notice; Attendance at Meeting	7
2.10	Quorum; Voting	7
2.11	Telephonic Meetings	7
2.12	Action Without Meeting	8
2.13	Compensation	8
2.14	Chairman and Vice Chairman	8
ARTICLE III COMMITTEES OF DIRECTORS		8
3.1	Committees	8
3.2	Authority of Committees	8
3.3	Executive Committee	8
3.4	Audit Committee	8
3.5	Nominating and Governance Committee	9
3.6	Compensation and Personnel Committee	9
3.7	Committee Meetings; Miscellaneous	9
ARTICLE IV OFFICERS		10
4.1	Officers	10
4.2	Election; Term	10
4.3	Removal of Officers	10
4.4	Duties of the President	10
4.5	Duties of the Vice President	10
4.6	Duties of the Secretary	10
4.7	Duties of the Chief Financial Officer	10
4.8	Duties of the Assistant Secretary	10
4.9	Duties of Other Officers	11
4.10	Voting Securities of Other Corporations	11

4.11	Compensation	11
4.12	Bonds	11
ARTICLE V EVIDENCE OF SHARES		11
5.1	Form	11
5.2	Transfer	11
5.3	Restrictions on Transfer	11
5.4	Lost or Destroyed Share Certificates	12
5.5	Registered Shareholders	12
ARTICLE VI MISCELLANEOUS PROVISIONS		12
6.1	Certain Definitions	12
6.2	Corporate Seal	12
6.3	Fiscal Year	12
6.4	Amendments	12
6.5	General	12

CARMAX, 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 in the month of June of each year on such day and convening at such time as shall be determined by the Board of Directors of the Corporation. 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 on such other day 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 February 1st and before March 1st of the year in

which the meeting will be held, if clause (ii) is not applicable, or (ii) not less than 90 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 up to 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 such shareholder 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. 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, email, 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 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, except 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 the authority to approve (i) the purchase and sale of real estate, (ii) the formation and incorporation of domestic operating subsidiaries of the Company having initial capitalizations not to exceed US$10,000,000 per subsidiary, (iii) the dissolution, merger, liquidation or unwinding of any domestic operating subsidiary of the Company, (iv) the acquisition and sale of car dealer franchises, (v) loan agreements, securitizations and other financing activities and (vi) other matters occurring in the ordinary course of the Company’s business.

3.4 Audit Committee. The Board of Directors shall appoint each year an Audit Committee, which shall be composed of at least three members of the Board, all of whom have no relationship to the Corporation that may, in the opinion of the Board of Directors, interfere with the exercise of their independence from

management and the Corporation. In addition, the members of the Committee shall satisfy the requirements for audit committee membership imposed by the New York Stock Exchange on audit committees of listed public companies and any eligibility requirements of the Securities and Exchange Commission with regard to companies whose securities are registered under the Securities Exchange Act of 1934, as amended. The Audit Committee shall assist the Board of Directors in fulfilling its responsibility relating to the corporate accounting and reporting practices of the Corporation. Subject to the approval of the Board of Directors, the Audit Committee shall adopt and from time to time assess and revise a written charter which will specify how the Committee will carry out its responsibilities and such other matters as the Board and the Audit Committee determine are necessary or desirable.

3.5 Nominating and Governance Committee. The Board of Directors shall appoint each year a Nominating and Governance 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:

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

(b) Recommend policies with regard to the size, composition and function of the Board.

(d) Assist the Chairman of the Board in carrying out an orientation program for new directors.

(e) Review and recommend to the Board changes and improvements in the functioning of the Board.

(f) 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:

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

(b) 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.)

(c) Award and administer pursuant to existing authority, the Corporation’s stock incentive programs and review and recommend similar future programs, if any.

(d) 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.

(e) 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 has no relationship to the Corporation that may, in the business judgment of the Board of Directors, interfere with the exercise of his or her independence from management and the Corporation.

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.

EX-10.7 4 dex107.htm CARMAX, INC. 2002 EMPLOYEE STOCK PURCHASE PLAN CarMax, Inc. 2002 Employee Stock Purchase Plan

Exhibit 10.7

CARMAX, INC.

2002 EMPLOYEE STOCK

PURCHASE PLAN

The CarMax, Inc. 2002 Employee Stock Purchase Plan (the “Plan”) provides eligible employees of CarMax, Inc., a Virginia corporation (the “Company”), and its Subsidiaries an opportunity to purchase CarMax, Inc. Common Stock (“Common Stock”) through payroll deductions and to receive a Company match for a portion of their payroll deductions.

1. Definitions. For the purposes of the Plan the following terms have the stated definitions. Additional terms are defined in the sections below.

Benefits Department—The employee benefits department of the Company.

CarMax Companies—CarMax, Inc. and its Subsidiaries.

Circuit City—Circuit City Stores, Inc., a Virginia corporation.

Circuit City Companies—Circuit City and its Subsidiaries.

Circuit City Plan—1984 Circuit City Stores, Inc. Employee Stock Purchase Plan, as Amended and Restated effective December 20, 2001, and as the same may be further amended from time to time.

Committee—The Compensation and Personnel Committee of the Board of Directors of the Company or, if no such committee has been appointed, the Board of Directors.

Compensation—All cash compensation and commissions (estimated as deemed necessary by the Committee) before any deductions or withholding and including overtime and bonuses, but exclusive of all amounts paid as reimbursements of expenses including those paid as part of commissions and those paid in the form of relocation bonuses, housing allowances or other payments in connection with employee relocations.

Eligible Employees—Employees who meet the requirements set forth in Section 3.

Eligibility Status—Employment with the CarMax Companies as a Regular Associate and as either (i) a Full-time Associate or (ii) a Part-time I Associate hired before June 1, 1993. The capitalized terms used in the preceding sentence which are not defined in the Plan shall have the meanings assigned to them in the Company’s Policies and Procedures Manual. Determinations regarding the status of an Employee for purposes of the Plan may be made from time to time by the Plan Administrator, but shall in each instance be uniform in nature and applicable to all persons similarly situated.

Employee—Any person employed by a CarMax Company as a common law employee on the United States payroll of such CarMax Company. It is expressly intended that persons not

employed as common law employees on the CarMax Company’s United States payroll are to be excluded from participation in the Plan, even if a court or administrative agency determines that such individuals are common law employees and not independent contractors.

Enrollment Date—The dates on which Eligible Employees may begin participation in the Plan. Enrollment Dates occur on the first day of each month.

Old CarMax Plan—1997 Circuit City Stores, Inc. Employee Stock Purchase Plan for CarMax Group Employees, as Amended and Restated effective December 20, 2001.

Participating Employees—Eligible Employees who participate in the Plan.

Plan Administrator—An Employee of the Company or one of its Subsidiaries appointed by the Committee as provided in Section 4 or, in the absence of any such specific appointment, the Chief Financial Officer of the Company.

Plan Service Provider—A Plan Service Provider/dealer registered with the Securities and Exchange Commission and a member of the National Association of Securities Dealers or other provider of employee plan administrative services selected by the Plan Administrator as provided in Section 4.

Separation Date—The date on which the separation of the CarMax Companies from the Circuit City Companies occurs as described in the Company’s Form S-4 Registration Statement (No. 333-85240) filed with the Securities and Exchange Commission.

Subsidiary—Any business entity (including, but not limited to, a corporation, partnership, or limited liability company) of which a company (the “Parent”) directly or indirectly owns one hundred percent (100%) of the voting interests of the entity unless the Committee determines that the entity should not be considered a Subsidiary for purposes of the Plan. If the Parent owns less than one hundred percent (100%) of the voting interest of the entity, the entity will be considered a Subsidiary for purposes of the Plan only if the Committee determines that the entity should be so considered.

2. Amount of Stock Subject to the Plan. The total number of shares of Common Stock which may be purchased under the Plan shall be 1,000,000, subject to adjustment as provided in Section 15. Such shares may be newly issued shares that have been authorized but not yet issued or may be shares purchased for Participating Employees on the open market.

3. Eligible Employees. All present and future Employees of the CarMax Companies who have been employed by a CarMax Company for at least one year are eligible to participate in the Plan, except: (i) Employees whose status is not within the definition of Eligibility Status, (ii) Employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, with respect to securities of the Company, (iii) Employees who are officers of CarMax Companies (other than those serving as Assistant Vice Presidents, Assistant Treasurers or Assistant Secretaries), or (iv) Employees who have not reached the age of majority in the state in which the Employee maintains his or her residence.

If an Employee has one year of service but is excluded from participation in the Plan due to the requirements set forth in (i), (ii), (iii) or (iv) in the preceding paragraph, the Employee will be eligible to participate in the Plan on the first Enrollment Date after he or she is no longer excluded because of such requirements. Continuity of service for purposes of the Plan is defined by the Rehire/Reinstatement and Change of Status Policy in effect for Employees of the CarMax Companies at the time the eligibility determination is made. In certain circumstances specified in the Employee Benefits Agreement between Circuit City Stores, Inc. and CarMax, Inc. effective as of October 1, 2002, service with a Circuit City Company will constitute service with a CarMax Company.

4. Administration of the Plan. The Plan shall be administered by the Committee. The Committee shall have all powers necessary to administer the Plan, including but not limited to the power to construe and interpret the Plan’s documents; to decide all questions relating to an Employee’s employment status and eligibility to participate in the Plan; to make adjustments to the limitations on payroll deductions set forth in Section 6; to employ such other persons as are necessary for the proper administration of the Plan; and to make all other determinations necessary or advisable in administering the Plan. Any construction, interpretation, or application of the Plan by the Committee shall be final, conclusive and binding.

The Committee shall appoint an officer or other Employee of the Company or one of its Subsidiaries to serve as the Plan Administrator (“Plan Administrator”). In the absence of such an appointment, the Chief Financial Officer of the Company shall serve as Plan Administrator. The Plan Administrator shall be authorized to designate other Employees of the Company or its Subsidiaries to assist him or her in carrying out his or her responsibilities under the Plan. The Plan Administrator and his or her designees shall be responsible for the general administration of the Plan including establishment of operating procedures and document submission deadlines and such other matters as the Committee deems necessary for the efficient and proper administration of the Plan.

The Plan Administrator shall appoint a Plan Service Provider in order to fulfill the duties of the Plan Service Provider set forth herein. The Plan Administrator shall also have the authority to replace any Plan Service Provider he or she has appointed for the Plan with another Plan Service Provider.

5. Participation in the Plan. An Eligible Employee may commence or recommence participation in the Plan effective on any Enrollment Date by completing and delivering on a timely basis to the Benefits Department a form prescribed by the Plan Administrator (the “Enrollment Form”).

An Employee seeking to participate in the Plan must deliver an Enrollment Form to the Benefits Department so that it is received sufficiently prior to the Enrollment Date to allow processing by the Benefits Department. The Plan Administrator may establish a submission deadline for Enrollment Forms. The Enrollment Form shall authorize payroll deductions from the Employee’s Compensation and authorize the Plan Service Provider to establish an employee stock purchase plan account for the Employee (“ESPP Account”).

A Participating Employee’s contributions will begin in the pay period that includes the Enrollment Date that the Employee’s enrollment is effective. The amount of the Participating Employee’s contribution will be based on his or her Compensation for the entire pay period in which the first day of the month occurs, even if part of that pay period is before the first day of the month.

6. Payroll Deductions and Limitations. Payroll deductions shall be a percentage of the Participating Employee’s Compensation for each payroll period as specified in the Participating Employee’s Enrollment Form. Payroll deductions for each payroll period shall not be less than 2% nor more than 10% of Compensation for such payroll period. Payroll deduction specifications shall be made in 1% increments. The Plan Administrator shall have the power to change these percentage limitations.

The maximum amount that may be contributed by each Participating Employee to the Plan in any one calendar year is $7,500. When a Participating Employee’s aggregate payroll deductions for the calendar year total $7,500, the Participating Employee’s purchases of Common Stock and payroll deductions under the Plan shall be suspended for the remainder of the calendar year. However, the Participating Employee shall continue to be a participant under the Plan unless he or she elects to stop contributions in the manner described in Section 16 or his or her participation terminates under Section 17 and the Employee’s purchases of Common Stock and payroll deductions will be resumed for the first full payroll period of the next calendar year. For purposes of this Section, “aggregate payroll deductions” for calendar year 2002 refers to the cumulative year to date deductions made for the Employee under the Plan, the Old CarMax Plan and the Circuit City Plan.

7. Changes in Payroll Deductions. A Participating Employee may change the percentage of his or her payroll deductions, subject to the minimum, maximum and allowed increments set forth in Section 6. To accomplish this, the Participating Employee must submit to the Benefits Department a new Enrollment Form stating the new deduction percentage. The change will be effective as of the first of the next month if the Enrollment Form is received sufficiently prior to the first of the month to allow processing by the Benefits Department. Deadlines for submission of Enrollment Forms for the purpose of changing payroll deductions may be established by the Plan Administrator. A Participating Employee may also elect to stop making contributions in the manner described in Section 16.

8. Purchase Price. The purchase price under the Plan for each share of Common Stock shall be (i) the average cost of all shares purchased for a particular month on the open market (“Open Market Purchase Price”) when the shares are purchased on the open market; or (ii) the closing price of the Common Stock on the New York Stock Exchange on the last business day of the month (“New Issue Purchase Price”) when the shares are purchased from the Company.

9. Method of Purchase. Except for the purchase to be made following the Separation Date as provided in Section 18, the shares of Common Stock to be purchased under the Plan shall be purchased once each month in one of the following manners at the Company’s discretion:

(a) Shares Purchased on the Open Market. The Company shall transmit the aggregate payroll deductions from the prior month together with the related Company Contribution (described below) and information on each Participating Employee’s contribution to the Plan Service Provider promptly after the end of each month. On a date as soon as practicable following receipt of the funds, the Plan Service Provider shall arrange for the purchase of Common Stock on the open market. As soon as practicable after completing the purchase of the shares, the Plan Service Provider shall credit the ESPP Account for each Participating Employee with as many shares and fractional interests in shares as the Participating Employee’s contribution and the Company Contribution will allow, based on the Open Market Purchase Price; or

(b) Shares Purchased Directly from the Company. Promptly after the end of each month, the Company shall issue and forward to the Plan Service Provider the number of shares of Common Stock that the Participating Employees’ contributions and the related Company Contribution have purchased at the New Issue Purchase Price. The Company shall also submit to the Plan Service Provider information on each Participating Employee’s contribution. As soon as practicable following receipt of the shares and related information, the Plan Service Provider shall credit the ESPP Account for each Participating Employee with his or her proportionate interest in the shares delivered, based on the New Issue Purchase Price.

10. Company Match. The Company shall contribute an amount each month (“Company Contribution”) towards the purchase of shares for the Participating Employees. The Company Contribution is set by the Board of Directors of the Company and is currently 15% of each Participating Employee’s contribution. The Company Contribution shall be used to purchase shares for Participating Employees as described in Section 9.

11. Dividend Reinvestment. Each ESPP Account shall be established with the following default dividend policy. Cash dividends, if any, paid with respect to the Common Stock held in each ESPP Account under the Plan shall be automatically reinvested in Common Stock, unless the Participating Employee directs otherwise. The Plan Service Provider shall arrange for the reinvestment of dividends on the open market at the Participating Employee’s expense as soon as the Plan Service Provider receives the cash dividends. The Company will not match reinvested dividends and will not pay any expenses associated with reinvesting dividends.

The Committee shall have the right at any time or from time to time upon written notice to the Plan Service Provider to change the default dividend reinvestment policy for future ESPP Accounts which are established under the Plan.

12. Rights as a Shareholder. A Participating Employee shall have the right to vote full shares of Common Stock held in the Participating Employee’s ESPP Account and the right to receive annual reports, proxy statements and other documents sent to shareholders of Common Stock generally; provided, however, that so long as such shares are held for a Participating Employee by the Plan Service Provider, if a Participating Employee fails to respond in a timely manner to a request for instructions with respect to voting, the Plan Service Provider shall take such action with respect to the shares held for the Participating Employee as permitted by the New York Stock Exchange rules. To the extent that such rules and applicable law permit, the

Plan Service Provider shall vote shares with respect to which no specific voting instructions are given in accordance with the recommendations of the Board of Directors of the Company.

By instructing the Plan Service Provider in accordance with the terms and conditions of the Plan Agreement (defined below), a Participating Employee shall have the right at any time:

(a) to obtain a certificate for the whole shares of Common Stock credited to the Participating Employee’s ESPP Account; or

(b) to direct that any whole shares of Common Stock in the ESPP Account be sold, and that the proceeds, less selling expenses, be remitted to the Participating Employee or remain in the ESPP Account pending further instructions.

13. Rights Not Transferable. Rights under the Plan are not transferable by a Participating Employee.

14. Joint Accounts. Participating Employees may, to the extent permitted by the Plan Service Provider, establish ESPP Accounts as joint accounts with rights therein as prescribed under applicable state law.

15. Certain Adjustments in the Case of Stock Dividends or Splits. The Committee shall make appropriate adjustments in the number of shares of Common Stock which may be purchased under the Plan if there are changes in the Common Stock by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers or consolidations.

16. Stopping Contributions. A Participating Employee may stop his or her contributions by completing the appropriate section of the Enrollment Form and delivering the form to the Benefits Department. Payroll Deductions will stop the pay period after the completed Enrollment Form is processed by the Benefits Department. In addition, contributions will be automatically stopped for any Participating Employee who goes on a leave of absence without pay, effective when the Employee ceases to be paid by the Company.

After contributions for an Employee have been stopped, the Plan Service Provider will leave the ESPP Account open and the Employee will be responsible for any account fees. Shares may be left in the ESPP Account or the Employee may sell the shares or request a certificate. If dividends are being paid and reinvested at the time of withdrawal, they will continue to be reinvested (if paid) unless the Employee requests the Plan Service Provider to pay them in cash. The Employee may also ask the Plan Service Provider to close the ESPP Account.

An Employee for whom contributions have been stopped may start contributions again pursuant to Section 5 at any time when the Employee is an Eligible Employee.

17. Termination of Participation in the Plan. An Employee’s participation in the Plan shall terminate upon the Employee’s: (i) ceasing to be employed by a CarMax Company, whether by reason of death or otherwise, (ii) ceasing to meet the eligibility requirements set forth in Section 3 or (iii) becoming an independent contractor (“Terminated Participant”).

With respect to each Terminated Participant: (i) payroll deductions shall cease at the next payroll period after the Benefits Department has received and processed notification of termination of participation, (ii) purchases shall be made through the calendar month in which the last payroll deduction is made, and (iii) the ESPP Account shall remain open subject to the same limitations and conditions set forth in the second paragraph of Section 16.

An Employee who has become a Terminated Participant may recommence participation pursuant to Section 5 when he or she again becomes an Eligible Employee.

18. Initial Purchase Following the Separation. All accumulated payroll deductions for Participating Employees who are transferred from the Old CarMax Plan as provided in Section 23 shall become accumulated payroll deductions under the Plan. An initial purchase of Common Stock under the Plan shall be made with the payroll deductions accumulated as of the Separation Date. Such purchase shall be made within 10 business days following the Separation Date in accordance with one of the methods of purchase described in Section 9, such method to be selected by the Company in its discretion.

19. Amendment of the Plan. The Board of Directors of the Company may, at any time, or from time to time, amend the Plan in any respect.

20. Termination of the Plan. The Plan and all rights of Employees hereunder shall terminate:

(a) on the last business day of any month that Participating Employees become entitled to purchase a number of shares of Common Stock greater than the number of shares remaining unpurchased out of the total number of shares which may be purchased under the Plan; or

(b) at any earlier date at the discretion of the Board of Directors of the Company.

In the event that the Plan terminates under circumstances described in (a) above, the Common Stock remaining unpurchased as of the termination date shall be allocated to Participating Employees for purchase on a pro rata basis.

Upon termination of the Plan, ESPP Accounts shall remain open subject to the same limitations and conditions set forth in the second paragraph of Section 16.

21. ESPP Account. The relationship between the Plan Service Provider and each Participating Employee shall be governed by a separate agreement of terms and conditions between them which may be set forth in the Enrollment Form or a separate document (“Plan Agreement”). In electing to participate in the Plan, a Participating Employee shall be deemed to have accepted the terms of the Plan Agreement. Any Plan Agreement pertaining to a Participating Employee’s participation in either the Circuit City Plan or the Old CarMax Plan before the Separation Date shall continue in effect with respect to such Participating Employee’s ESPP Account under the Plan unless and until the Participating Employee and the Plan Service Provider amend or replace such agreement. If a Participating Employee already has an ESPP

Account due to participation in the Circuit City Plan or the Old CarMax Plan, the same ESPP Account will be used for new purchases under the Plan.

22. Payment of Expenses. The Company shall pay all expenses associated with purchases under the Plan, including brokerage commissions, if any. The Company will not pay expenses for other transactions in the Participating Employee’s ESPP Account, including sales of securities, dividend reinvestments, issuance of stock certificates, purchases of securities outside the Plan or expenses associated with open ESPP Accounts where the owner is not a Participating Employee.

23. Transition for Old CarMax Plan Participants. By allowing payroll deductions to continue after the Separation Date, any Participant will be deemed to have enrolled in the Plan and to have agreed to the terms and conditions of the ESPP Account and to the terms of the Plan.

All shares and fractional interests in shares of Common Stock credited to the ESPP Account of each Participant as of the Separation Date will be transferred as of the Separation Date and credited to an ESPP Account for such Participant under the Plan.

24. Effective Date of the Plan. The Plan shall be effective as of the Separation Date.

25. Notices. Any notice or instruction to be given the Company shall be in writing and delivered by hand, Company office mail or U.S. mail to the address below:

CarMax, Inc.

c/o Secretary, CarMax, Inc.

4900 Cox Road

Glen Allen, Virginia 23060

Any signature submitted to the Company by facsimile will have the same force and effect as an original signature.

26. Government and Other Regulations. The Plan, and the rights to purchase Common Stock hereunder, and the Company’s obligation to sell and deliver Common Stock hereunder shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approvals by any regulatory or government agency as may, in the opinion of counsel for the Company, be required.

27. Indemnification of Committee. Service on the Committee shall constitute service as a member of the Board of Directors of the Company so that members of the Committee shall be entitled to indemnification and reimbursement as members of the Board of Directors of the Company pursuant to its Articles of Incorporation and Bylaws.

EX-10.8 5 dex108.txt AMENDED AND RESTATED CREDIT AGREEMENT REDACTED EXHIBIT 10.8 EXECUTION COPY AMENDED AND RESTATED CREDIT AGREEMENT dated as of February 10, 2003 among CARMAX AUTO SUPERSTORES, INC., as Borrower CARMAX, INC., as Guarantor VARIOUS FINANCIAL INSTITUTIONS and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as Agent TABLE OF CONTENTS

-i- TABLE OF CONTENTS (continued)

-ii- TABLE OF CONTENTS (continued)

-iii- TABLE OF CONTENTS (continued)

-iv- TABLE OF CONTENTS (continued)

-v- TABLE OF CONTENTS (continued)

-vi- TABLE OF CONTENTS (continued)

SCHEDULES SCHEDULE 2.1 Lenders and Percentages* SCHEDULE 8.6 Litigation and Contingent Liabilities* SCHEDULE 8.8 Subsidiaries* SCHEDULE 8.15 Environmental Matters* SCHEDULE 8.16 Insurance* SCHEDULE 8.20 Labor Matters* SCHEDULE 8.22 Financing Statements* SCHEDULE 8.23 Dealer Franchise Agreements* SCHEDULE 9.7 Existing Indebtedness* SCHEDULE 9.20 Existing Investments* SCHEDULE 13.3 Addresses for Notices* EXHIBITS EXHIBIT A Form of Note (Section 3.1) EXHIBIT B Form of Compliance Certificate (Section 9.1.3) EXHIBIT C Guaranty (Section 1.1)* EXHIBIT D Security Agreement (Section 1.1)* EXHIBIT E Subordination Terms (Section 1.1) EXHIBIT F Form of Solvency Certificate (Section 10.1.9)* EXHIBIT G Form of Assignment Agreement (Section 13.9.1)* EXHIBIT H Form of Opinion of Counsel (Section 10.1.7)* EXHIBIT I Form of Borrowing Base Certificate (Section 1.1) EXHIBIT J Form of Report of Assets and Liabilities (Section 9.1.2)* EXHIBIT K Form of Confirmation of Guaranty (Section 10.1.4)* EXHIBIT L Form of Control Agreement (Section 1.1)* EXHIBIT M Form of Inventory Detail Report (Section 9.1.10)* * These non-material schedules and exhibits have been omitted from the agreement as filed. CarMax agrees to furnish supplementally to the Commission upon request a copy of such schedules and exhibits. -vii- AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of February 10, 2003 (this "Agreement") is entered into among CARMAX AUTO SUPERSTORES, INC., a Virginia corporation (the "Borrower"), CARMAX, INC., a Virginia corporation (the "Company"), the financial institutions that are or may from time to time become parties hereto (together with their respective successors and assigns, the "Lenders") and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC (in its individual capacity, "DCSNA"), as agent for the Lenders. WHEREAS, the Borrower, the Company, certain financial institutions and DCSNA, as agent, entered into that certain Credit Agreement, dated as of May 17, 2002 (the "Existing Credit Agreement"), whereby certain lenders party thereto agreed to make available to the Borrower term loans and a revolving credit facility upon the terms and conditions set forth therein; and WHEREAS, the Borrower and the Company have requested the Lenders to amend and restate the Existing Credit Agreement on the terms and conditions set forth in this Agreement, to set forth, among other things, the terms and conditions under which the Lenders hereafter will make available to the Borrower term loans and a revolving credit facility; it being the intention of the Borrower, the Company, the Lenders and the Agent that this Agreement not effect a novation of the obligations of the Borrower and the Company to the Lenders and the Agent under the Existing Credit Agreement but merely a restatement and, where applicable, a substitution of the terms governing and evidencing such obligations hereafter; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the Existing Credit Agreement is hereby amended and restated, and the parties hereto agree, as follows: SECTION 1. DEFINITIONS. 1.1 Definitions. When used herein the following terms shall have the following meanings: Acquisition means an acquisition by the Company or any Subsidiary of all or substantially all the assets of a business unit or a controlling interest in the capital stock or other ownership interests of an Automobile Dealership, whether through a purchase, merger, consolidation or otherwise. Acquisition Cost means, (x) with respect to any New Motor Vehicle, the wholesale purchase price charged by the Manufacturer thereof as reflected in the invoice in respect of such New Motor Vehicle issued by such Manufacturer to the Company or its applicable Subsidiary less any related deductions set forth on such invoice, and (y) with respect to any Used Motor Vehicle, the cost of the Company or its applicable Subsidiary to purchase such Used Motor Vehicle. Affiliate of any Person means (i) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person and (ii) any officer or director of such Person. A Person shall be deemed to be "controlled by" any other Person if such Person possesses, directly or indirectly, power to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Agent means DCSNA in its capacity as agent for the Lenders hereunder and any successor thereto in such capacity. Agreement - see the Preamble. Amendment Effective Date - see Section 10.1. Assignment Agreement - see Section 13.9.1. Attorney Costs means, with respect to any Person, all reasonable fees and charges of any counsel to such Person, the reasonable allocable cost of internal legal services of such Person (to the extent incurred after the Initial Closing Date), all reasonable disbursements of such internal counsel (to the extent incurred after the Initial Closing Date) and all court costs and similar legal expenses. Auction House means an auction house that deals in Used Motor Vehicles and which has an established Drafting arrangement with the Fronting Lender that is acceptable to the Fronting Lender. Automobile Dealership means a business that operates one or more dealerships for the retail sale, or retail sale and lease, of new and/or used automobiles or trucks and businesses ancillary to the operation of dealerships owned or operated by the Company or its Subsidiaries, including service and parts operations, body shops, the sale of finance, extended warranty and insurance products (including after-market items), the financing of the purchase of new and/or used vehicles, the purchase, sale and servicing of finance contracts for new and/or used vehicles and other related businesses. Borrower - see the Preamble. Borrowing Base means, as of any date, the aggregate final cost of all Motor Vehicles (other than Motor Vehicles subject to any Lien, other than Permitted Liens of the type described in clauses (i), (ii), (iii) and (x) of the definition of Permitted Lien, and also excluding, for so long as any Ford Restriction exists, any New Motor Vehicles of the Ford, Lincoln and Mercury makes held by Kenosha) as of such date, which amount is reported for each store location in the general ledger of the Company or the applicable Subsidiary (it being understood that the final cost of any Motor Vehicle as of any date shall equal the Acquisition Cost of such Motor Vehicle plus, in the case of Used Motor Vehicles only, all transportation costs and other incremental expenses incurred before such date in connection with the acquisition of such Used Motor Vehicle plus, in the case of Used Motor Vehicles only, all labor costs and other incremental expenses incurred before such date in connection with the reconditioning of such Used Motor Vehicle minus, in the case of Used Motor Vehicles only, any market value adjustments or other downward adjustments made before such date in the value of such Used Motor Vehicles minus, in the case of Used Motor Vehicles only and only if the Company materially changes, without the consent of the 2 Agent, its policies, procedures or methods for valuing its Used Motor Vehicles inventory from those in effect on the Initial Closing Date, any market value adjustments reasonably determined by the Agent for such Used Motor Vehicles). The Borrowing Base shall not include any Motor Vehicle securing a Transferred Receivable (as defined in the Security Agreement), which Motor Vehicle has been returned to, repossessed by or foreclosed on by the Company or any Subsidiary (a "Securitization Repossession"); provided that so long as the aggregate final cost of all Securitization Repossessions at any time does not exceed 1% of the Borrowing Base at such time, the final cost of the Securitization Repossessions need not be deducted from the Motor Vehicles included in the Borrowing Base. Borrowing Base Certificate means a certificate in substantially the form set forth in Exhibit I. Business Day means any day of the year (other than any Saturday or Sunday) which is not a day on which commercial banks are authorized or required by law to close in Detroit, Michigan. Capital Expenditures means all expenditures which, in accordance with GAAP, would be required to be capitalized and shown on the consolidated balance sheet of the Company, but excluding expenditures made in connection with the replacement, substitution or restoration of assets to the extent financed (i) from insurance proceeds (or other similar recoveries) paid on account of the loss of or damage to the assets being replaced or restored or (ii) with awards of compensation arising from the taking by eminent domain or condemnation of the assets being replaced. Capital Lease means, as of any date, any lease of property, real or personal, which would be capitalized on a balance sheet of the lessee prepared as of such date in accordance with GAAP. CarMax Group means the Company and its Subsidiaries. CarMax Properties means CarMax Properties, LLC, a Virginia limited liability company. Cash Collateralize means to deliver cash collateral to the Agent, to be held as cash collateral for outstanding Drafting Agreements and other Drafting arrangements, pursuant to documentation satisfactory to the Agent. Derivatives of such term have corresponding meanings. Cash Equivalent Investment means, at any time, (a) any evidence of Indebtedness, maturing not more than one year after such time, issued or guaranteed by the United States Government or any agency thereof, (b) commercial paper, maturing not more than one year from the date of issue, or corporate demand notes, in each case rated at least A-2 by Standard & Poor's Ratings Group or P-2 by Moody's Investors Service, Inc., (c) any certificate of deposit (or time deposits represented by such certificates of deposit) or banker's acceptance, maturing not more than one year after such time, or overnight Federal Funds transactions that are issued or sold by DCSNA or by a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $100,000,000, (d) any repurchase agreement entered into with DCSNA or any commercial banking institution of 3 the stature referred to in clause (c) which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c) and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of DCSNA or such commercial banking institution thereunder and (e) shares of money market mutual funds within the definition of Rule 2a-7 promulgated by the SEC under the Investment Company Act of 1940. CERCLA - see Section 8.15. Change in Control means (a) any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934 (the "Exchange Act")) shall acquire beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 20% of the Voting Stock of the Company or (b) a majority of the members of the Board of Directors of the Company shall cease to be Continuing Members or (c) the failure of the Company to own, beneficially and of record, 100% of the Voting Stock of the Borrower, free and clear of any Lien (except for Permitted Liens of the type described in clauses (i), (ii) and (iii) of the definition of "Permitted Lien"). For purposes of the foregoing, "Continuing Member" means a member of the Board of Directors of the Company who either (i) was a member of the Company's Board of Directors on the day before the Amendment Effective Date and has been such continuously thereafter or (ii) became a member of such Board of Directors after the Amendment Effective Date and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Company's Board of Directors. Circuit City means Circuit City Stores, Inc., a Virginia corporation. Code means the Internal Revenue Code of 1986. Collateral means property of the Company and its Subsidiaries in which a Lien is granted under the Collateral Documents. Collateral Documents means the Security Agreement and any other agreement or instrument pursuant to which the Company, any Subsidiary or any other Person grants collateral to the Agent for the benefit of the Lenders to secure the obligations hereunder and under the other Loan Documents. Commitment means, as to any Lender, such Lender's commitment to make Loans, and to issue or participate in Drafting Agreements, Drafts and Swing Line Loans, under this Agreement. The initial amount of each Lender's Revolving Percentage of the Revolving Commitment Amount and of the aggregate amount of the Term Loans is set forth on Schedule 2.1. Company - see the Preamble. Computation Period means each period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter. 4 Consolidated Current Assets means, at any date, the aggregate amount of all assets of the Company and its Subsidiaries, as shown on the most recent consolidated balance sheet of the Company and its Subsidiaries, that would be classified as current assets (including cash, marketable securities, accounts receivable, inventory and prepaid expenses) in accordance with GAAP. Consolidated Current Liabilities means, at any date, the aggregate amount of all liabilities of the Company and its Subsidiaries, as shown on the most recent consolidated balance sheet of the Company and its Subsidiaries, that would be classified as current liabilities in accordance with GAAP. Consolidated Net Income means, for any period, the net income (or loss) of the Company and its Subsidiaries for such period, excluding any gains from asset sales (other than in the ordinary course of business), any extraordinary gains (or losses) and any gains (or losses) from discontinued operations, in each case determined in accordance with GAAP. Consolidated Tangible Net Worth means, at any date, all amounts which, in conformity with GAAP, would be included under stockholder's equity on the consolidated balance sheet of the Company and its Subsidiaries at such time; provided that, in any event, such amounts are to be net of amounts carried on the consolidated financial statements of the Company and its Subsidiaries for (i) any write-up in the book value of any assets of the Company and its Subsidiaries resulting from a revaluation thereof subsequent to the date of this Agreement, (ii) treasury stock, (iii) patents, patent applications, copyrights, trademarks, trade names, goodwill, experimental or organizational expenses and other like intangibles and (iv) to the extent not otherwise eliminated in the consolidation of the balance sheet of the Company and its Subsidiaries, capital contributions to, or other Investments in, Unrestricted Subsidiaries. Control Agreement means a control agreement substantially in the form of Exhibit L. Controlled Group means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA. Customary Recourse Arrangements means limited recourse arrangements that are customary for Securitizations and that do not impair the characterization of the relevant Securitization as a true sale under applicable law, including bankruptcy and insolvency law (it being understood that Customary Recourse Arrangements shall not include (i) arrangements under which the Company or any Subsidiary (other than the SPE participating in the relevant Securitization) directly assumes the credit risk associated with the securitized assets or (ii) indirect recourse arrangements (such as the use of a subordinated note or the retention of a subordinated certificate) under which the Company or any Subsidiary (other than the SPE participating in the relevant Securitization) would reasonably expect to suffer economic loss based on the historical performance of the securitized assets). DCSNA - see the Preamble. Dealer Franchise Agreement - see Section 8.23. 5 Disposal - see the definition of "Release". Dollar and the sign "$" mean lawful money of the United States of America. Draft means a draft for the account of the Borrower or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary) on the Fronting Lender made by a Manufacturer with respect to New Motor Vehicles or an Auction House with respect to Used Motor Vehicles. Drafting means the process of presenting a Draft. Drafting Agreement means an agreement between the Fronting Lender and a Manufacturer, entered into for the account of the Borrower or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary) (and in some cases acknowledged or countersigned by the Borrower or the applicable Subsidiary) under which such Manufacturer is entitled to present Drafts to the Fronting Lender for payment of invoices identifying New Motor Vehicles delivered or shipped by such Manufacturer to the Borrower or such Subsidiary, such agreements to be on terms and conditions satisfactory to the Fronting Lender. EBITDAR means, for any period, Consolidated Net Income for such period plus, to the extent deducted in determining such Consolidated Net Income, Interest Expense, Rental Expense, income tax expense, depreciation and amortization for such period. EFT System shall mean the electronic funds transfer system maintained by the Fronting Lender and pursuant to which the Borrower may transfer funds, or cause the transfer of funds, from accounts of the Fronting Lender to accounts of the Borrower and the Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries) or from accounts of the Borrower and the Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries) to accounts of the Fronting Lender. Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for Release or injury to the environment. Environmental Laws means all present or future Federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to Environmental Matters. Environmental Matters means any matter arising out of or relating to health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, release, control or cleanup of any Hazardous Substance. ERISA means the Employee Retirement Income Security Act of 1974. Event of Default means any of the events described in Section 11.1. 6 Excluded Subsidiary means CarMax Properties and each other Subsidiary of the Company that the Company designates in writing as an Excluded Subsidiary; an Excluded Subsidiary shall not (and such Subsidiary shall continue to be an Excluded Subsidiary only for so long as it does not) engage, directly or indirectly, in the business of selling, or selling and leasing, New Motor Vehicles and/or Used Motor Vehicles or in businesses ancillary thereto or hold any Motor Vehicles, other Collateral or any proceeds thereof. Existing Credit Agreement - see the Recitals. Federal Funds Rate means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor publication, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 A.M. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. Financed Capital Expenditures means any Capital Expenditure that is financed by a Person other than the Company and its Subsidiaries (other than with the proceeds of Loans hereunder) within 540 days (or within 60 days in the case of Capital Expenditures relating to Property other than real property and improvements thereon) of the making thereof. Fiscal Quarter means a fiscal quarter of a Fiscal Year. Fiscal Year means the fiscal year of the Company and its Subsidiaries, which period shall be the 12-month period ending on the last day of February in each year. References to a Fiscal Year with a number corresponding to any calendar year (e.g., "Fiscal Year 2002") refer to the Fiscal Year ending on the last day of February in such calendar year. Fixed Charge Coverage Ratio means, for any Computation Period, the ratio of (a) the total for such period of EBITDAR minus the sum of (i) income taxes paid by the Company and its Subsidiaries plus (ii) Capital Expenditures (other than Financed Capital Expenditures) to (b) the sum of (i) Interest Expense for such period plus (ii) Rental Expense for such period. Ford means Ford Motor Company and its Subsidiaries. Ford Restriction means any valid and enforceable provision restricting Kenosha from granting a Lien to the Agent on Kenosha's assets consisting of New Motor Vehicles of the Ford, Lincoln and Mercury makes to secure its obligations under the Loan Documents, which restriction was contained on the Initial Closing Date in Kenosha's Dealer Franchise Agreement with Ford. FRB means the Board of Governors of the Federal Reserve System or any successor thereto. Fronting Lender means DCSNA in its individual capacity and its successors and assigns in such capacity. 7 Fronting Lender Advance - see Section 2.9. GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or organizations with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. Guarantee of any Person means any contract, agreement or understanding of such Person pursuant to which such Person guarantees, or in effect guarantees, any Indebtedness of any other Person (the "Primary Obligor") in any manner, whether directly or indirectly, including agreements: (i) to purchase such Indebtedness or any property constituting security therefor, (ii) to advance or supply funds (A) for the purchase or payment of such Indebtedness, or (B) to maintain net worth or working capital or other balance sheet conditions, or otherwise to advance or make available funds for the purchase or payment of such Indebtedness, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness of the ability of the Primary Obligor to make payment thereof or (iv) otherwise to assure the holder of such Indebtedness against loss in respect thereof; except that "Guarantee" shall not include (x) the endorsement by the Company or a Subsidiary in the ordinary course of business of negotiable instruments or documents for deposit or collection or (y) any Customary Recourse Arrangements of the Company or any Subsidiary in connection with any Securitization of Motor Vehicle Receivables owing (immediately prior to such Securitization) to the Company or any of its Subsidiaries. Guaranteed Obligations means all indebtedness, liabilities, obligations, covenants and duties of, and all terms and conditions to be observed by, the Borrower due or owing to, or in favor or for the benefit of, the Agent (for the benefit of the Lenders) and the Lenders under the Loan Documents, in each case, of every kind, nature and description, direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, now existing or hereafter arising. Guaranty means a guaranty substantially in the form of Exhibit C. Hazardous Substances - see Section 8.15. Hedging Agreement means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices. Hedging Obligation means, with respect to any Person, any liability of such Person under any Hedging Agreement. Indebtedness of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (b) all obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (c) all obligations of such Person to pay the deferred purchase price of property or services 8 (excluding trade accounts payable in the ordinary course of business), (d) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person (the amount of any such indebtedness of another Person shall not exceed the greater of the book value or fair market value of the property subject to such Lien, provided that recourse with respect to such indebtedness is expressly limited by the instruments governing such indebtedness to the assets of such Person subject to such Lien), (e) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and banker's acceptances issued for the account of such Person, (f) all Hedging Obligations of such Person, (g) all obligations of such Person in respect of any Guarantee, and (h) all indebtedness of any partnership of which such Person is a general partner (other than to the extent that the instrument or agreement evidencing such indebtedness expressly limits the liability of such Person in respect thereof). Indemnified Liabilities - see Section 13.13. Initial Closing Date means May 17, 2002. Interest Expense means, for any period, the consolidated interest expense of the Company and its Subsidiaries for such period (including all imputed interest on Capital Leases), determined in accordance with GAAP. Interest Rate means, for each day, a rate per annum equal to the sum of (a) (i) in the case of each day from and including the first day of each calendar month through and including the 15th day of such calendar month, the Eurodollar Rate for the first day of such calendar month and (ii) in the case of each day from and including the 16th day of each calendar month through and including the last day of such calendar month, the Eurodollar Rate for the 16th day of such calendar month plus (b) a margin of [CONFIDENTIAL]* % per annum (provided that at any time an Event of Default exists, if requested by the Required Lenders, the margin shall be [CONFIDENTIAL (the omitted percentage margin that applies when an Event of Default exists is 2.00% greater than the omitted percentage margin that applies when no Event of Default exists)]* %). For purposes of this definition, "Eurodollar Rate" means, for any day, (A) the rate of interest (rounded upwards, if necessary, to the next 1/16th of 1%) published in The Wall Street Journal (Eastern Edition) on such day (or if not published on such day, for the immediately preceding day on which it was published) in its "Money Rates" column as the one-month London Interbank Offered Rate for Dollar-denominated deposits (if The Wall Street Journal ceases to publish such a rate or substantially changes the methodology used to determine such rate, then the rate shall be the rate of interest (rounded upwards, if necessary, to the next 1/16th of 1%) published by Reuters Monitor Rates Service on such day (or if not published on such day, for the immediately preceding day on which it was published) as the one-month London Interbank Offered Rate for Dollar-denominated deposits), and (B) if such rate is not published or available, such rate as shall be otherwise independently determined by the Agent on a basis substantially similar to the methodology used by The Wall Street Journal on the date of this Agreement. Investment means, relative to any Person, any investment in another Person, whether by acquisition of any debt or equity security, by making any loan or advance or by becoming _____________ *Confidential Treatment has been requested for the redacted portion pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. The confidential, redacted portions have been filed separately with the United States Securities and Exchange Commission. 9 obligated with respect to a Guarantee in respect of obligations of such other Person (other than travel and similar advances to employees in the ordinary course of business). The amount of any Investment shall be deemed to be the amount of cash invested (or, in the case of property invested other than cash, the fair market value of the property invested) less an amount equal to the lesser of the amount of cash received by the investing person as a return on capital with respect to such Investment and the initial amount of such Investment, in either case, less the cost of disposition of the Investment. Kenosha means Kenosha Automotive, LLC, a Virginia limited liability company. Lender - see the Preamble. References to the "Lenders" shall include the Fronting Lender; for purposes of clarification only, to the extent that DCSNA (or any successor Fronting Lender) may have any rights or obligations in addition to those of the other Lenders due to its status as Fronting Lender, its status as such will be specifically referenced. Lien means, with respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person which secures payment or performance of any obligation and shall include any Capital Lease, and any mortgage, lien, encumbrance, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise. Loan Documents means this Agreement, the Notes, the Guaranty, the Collateral Documents and the Control Agreement. Loan Party means the Borrower, the Company and each Subsidiary party to any Loan Document. Loans means Revolving Loans, Swing Line Loans and Term Loans. Manufacturer means the manufacturer or distributor of a new Motor Vehicle. Manufacturer/Dealer Statement means a financial statement prepared by the Company or one of its Subsidiaries for a Manufacturer and delivered to such Manufacturer on a monthly basis. Manufacturer's Certificate means a Manufacturer's Statement of Origin, Manufacturer's Certificate, MSO, Certificate of Origin or other document evidencing the ownership or transfer of ownership of a New Motor Vehicle from a Manufacturer to the Company or any of its Subsidiaries. Margin Stock means any "margin stock" as defined in Regulation U. Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole, (b) a material impairment of the ability of the Borrower, the Company or any Subsidiary to perform any of its obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the collateral under the 10 Collateral Documents or upon the legality, validity, binding effect or enforceability against the Borrower, the Company or any Subsidiary of any Loan Document. Motor Vehicle means an automobile, truck, van or other motor vehicle, including New Motor Vehicles and Used Motor Vehicles that are inventory (as defined in the Uniform Commercial Code) of the Company and its Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries), excluding any motor vehicle not held for sale or lease. Motor Vehicle Receivables means retail installment sale contracts or other agreements under which Motor Vehicles are purchased or leased from the Company or any Subsidiary, all amounts due and owing under such contracts or other agreements and all proceeds thereof. Multiemployer Pension Plan means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Company or any member of the Controlled Group may have any liability. New Motor Vehicle means any Motor Vehicle purchased by the Company or any of its Subsidiaries directly from the Manufacturer of such Motor Vehicle which has not been previously owned by any other Person. Note - see Section 3.1. Operating Lease means any lease of (or other agreement conveying the right to use) any Property by the Company or any Subsidiary, as lessee, other than any Capital Lease. Outstandings means, at any time, the sum of (a) the aggregate principal amount of all Revolving Loans, Swing Line Loans and funded Drafts then outstanding plus (b) the aggregate principal amount of all Term Loans then outstanding. PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. Pension Plan means a "pension plan", as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a Multiemployer Pension Plan), and to which the Company or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA. Percentage means a Revolving Percentage or a Term Percentage, as the context may require. Permitted Liens means: (i) Liens for taxes, assessments or governmental charges or levies on property of the Company or any Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and with respect to which the 11 Company or such Subsidiary shall have set aside adequate reserves in accordance with GAAP; (ii) Liens imposed by law, such as carrier's, warehousemen's and mechanic's liens and other similar liens, which arise in the ordinary course of business with respect to obligations not yet due or being contested in good faith and by appropriate proceedings and with respect to which the Company or any Subsidiary shall have set aside adequate reserves in accordance with GAAP; (iii) Liens arising out of pledges or deposits under workers' compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits or similar legislation; (iv) attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding $5,000,000 arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings; (v) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of the Company or any Subsidiary; (vi) subject to the $5,000,000 limitation set forth in Section 9.7(g), (i) Liens arising in connection with Capital Leases (and attaching only to the property being leased), (ii) Liens existing on property at the time of the acquisition thereof by the Company or any Subsidiary (and not created in contemplation of such acquisition) and (iii) Liens that constitute purchase money security interests on any property securing debt incurred for the purpose of financing all or any part of the cost of acquiring such property, provided that (x) any such Lien attaches to such property within 90 days of the acquisition thereof and attaches solely to the property so acquired and (y) no such Lien may attach to any Motor Vehicle; (vii) extensions, renewals or replacements (or successive extensions, renewals or replacements) in whole or in part of any Lien referred to in the foregoing clauses (i) through (vi) inclusive, provided that the property subject to such extension, renewal or replacement shall be limited to the property originally subject to the Lien so extended, renewed or replaced (plus improvements, if any, on such property); (viii) Liens on Motor Vehicle Receivables created or incurred in connection with any Securitization of such Motor Vehicle Receivables owing (immediately prior to such Securitization) to the Company or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary); (ix) Liens in addition to those referred to in the foregoing clauses (i) through (viii) inclusive, provided that the aggregate amount of all Indebtedness 12 secured by such Liens may not exceed 10% of Consolidated Tangible Net Worth as of the end of the Fiscal Quarter immediately preceding the creation or incurrence of such Lien; and (x) Liens under the Collateral Documents. Person means any natural person, corporation, partnership, joint venture, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity. Property of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. Property Insurance means all insurance insuring any direct physical loss or damage to the Collateral and any lost income or profits resulting from consequences of damage to the Collateral or caused by any interruption in business operations, whether designated as property insurance, business interruption insurance or otherwise, and whether the insurance insures against specific risks or all risks, and includes any reinsurance and excess insurance the Company or its Subsidiaries may obtain; it being understood and agreed that, on the Amendment Effective Date, the Property Insurance maintained by the Company and its Subsidiaries is insurance against the direct physical loss or damage to Motor Vehicles for sale at covered locations (including fire and other risks) and also provides for the necessary interruption of business. RCRA - see Section 8.15. Regulation U means Regulation U of the FRB. Release has the meaning specified in CERCLA and the term "Disposal" (or "Disposed") has the meaning specified in RCRA; provided that in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply as of the effective date of such amendment; and provided, further, that to the extent that the laws of a state wherein any affected property lies establish a meaning for "Release" or "Disposal" which is broader than is specified in either CERCLA or RCRA, such broader meaning shall apply. Rental Expense means, for any period, all payments made or required to be made during such period by the Company and its Subsidiaries, as lessee or sublessee under any Operating Lease, as rental payments or contingent rentals, as calculated in accordance with GAAP. Required Lenders means Lenders having Total Percentages aggregating 66-2/3% or more. Revolving Commitment means, as to any Lender, the Commitment of such Lender to make Revolving Loans, and to issue or participate in Drafting Agreements, Drafts and Swing Line Loans, hereunder. Revolving Commitment Amount means $200,000,000, as reduced from time to time pursuant to Section 6.1. 13 Revolving Lender means, at any time, any Lender that then has a Revolving Commitment or then holds any Revolving Loan. Revolving Loan - see Section 2.1.1. Revolving Outstandings means, at any time, the aggregate principal amount of all Revolving Loans, Swing Line Loans and funded Drafts then outstanding. Revolving Percentage means, with respect to any Lender, the percentage which (a) the amount of such Lender's Revolving Commitment is of (b) the Revolving Commitments of all Lenders; provided that, after the Revolving Commitments, all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, "Revolving Percentage" shall mean, as to any Lender, the percentage which the sum of the aggregate principal amount of such Lender's Revolving Loans plus the participations of such Lender in all funded Drafts and Swing Line Loans is of the sum of the aggregate principal amount of all Revolving Loans and Swing Line Loans plus the amount of all funded Drafts. The initial Revolving Percentage of each Lender is set forth on Schedule 2.1. SEC means the Securities and Exchange Commission or any other governmental authority succeeding to any of the principal functions thereof. Security Agreement means a security agreement substantially in the form of Exhibit D. Securitization means a transaction in which (a) financial assets originated or acquired by the Company or any Subsidiary are transferred (pursuant to a true sale) to one or more SPEs in a manner that legally isolates the transferred assets from a bankruptcy or insolvency of the Company or such Subsidiary and (b) securities evidencing an interest in, or otherwise backed by, such transferred assets are issued to investors. SPE means a bankruptcy remote, special purpose entity that satisfied, at the time of its formation, the special purpose entity criteria published by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. Subordinated Debt means all Indebtedness for borrowed money of the Borrower and the Subsidiaries which (a) is made subordinate to the Borrower's Indebtedness to the Lenders hereunder in the instruments evidencing such subordinated Indebtedness by provisions not more favorable to the holders of such subordinated Indebtedness than those set forth on Exhibit E hereto and (b) has been approved in writing by the Required Lenders. Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person and/or its other Subsidiaries own, directly or indirectly, such number of outstanding shares or other ownership interests as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of the Company. 14 Substantial Portion means, with respect to the Property of the Company and its Subsidiaries, Property which (i) represents more than 10% of the consolidated assets of the Company and its Subsidiaries as shown in the consolidated financial statements of the Company and its Subsidiaries as of the end of the most recent Fiscal Quarter or (ii) is responsible for more than 10% of the consolidated net sales or of the consolidated net income of the Company and its Subsidiaries as reflected in the financial statements referred to in clause (i) above. Swing Line Loan - see Section 2.1.3. Taxes - see Section 7.6. Term Commitment means, as to any Lender, the Commitment of such Lender to make Term Loans hereunder. Term Lender means, at any time, any Lender that then has a Term Commitment or then holds any Term Loan. Term Loan - see Section 2.1.2. Term Percentage means, with respect to any Lender, the percentage which the aggregate principal amount of such Lender's Term Loans is of the aggregate principal amount of all Term Loans. The initial Term Percentage of each Lender is set forth on Schedule 2.1. Termination Date means the earlier to occur of (a) May 17, 2004 (or any later date that may be established as the Termination Date pursuant to Section 2.12) or (b) such other date on which the Commitments terminate pursuant to Section 6 or 11. Total Liabilities means, at any time, the total amount of liabilities that would appear on a balance sheet of the Company and its Subsidiaries at such time prepared in accordance with GAAP. Total Percentage means, with respect to any Lender, the percentage which (a) the amount of such Lender's Revolving Commitment (or, after the Revolving Commitments, all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, the sum of the aggregate principal amount of such Lender's Revolving Loans plus the participations of such Lender in all funded Drafts and Swing Line Loans) plus the aggregate principal amount of such Lender's Term Loan is of (b) the Revolving Commitments of all Lenders (or, after the Revolving Commitments, all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, the sum of the aggregate principal amount of all Revolving Loans and Swing Line Loans plus the amount of all funded Drafts) and the aggregate principal amount of all Term Loans. Uniform Commercial Code means the Uniform Commercial Code as in effect from time to time in the State of Michigan. Unmatured Event of Default means any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default. 15 Unrestricted Subsidiary means each Subsidiary of the Company that is (and only for so long as it is) an SPE and each other Subsidiary of the Company that the Required Lenders designate in writing as an Unrestricted Subsidiary; on the date hereof, the Unrestricted Subsidiaries are CarMax Funding, LLC, a Virginia limited liability company, CarMax Auto Receivables LLC, a Virginia limited liability company, CPD, Inc., a Virginia corporation, and CFC II, Inc., a Virginia corporation. Used Motor Vehicle means, at any time, a Motor Vehicle that is not a New Motor Vehicle. Voting Stock of any Person means outstanding securities (on a fully diluted basis and taking into account any securities or contract rights exercisable, exchangeable or convertible into equity securities) of such Person having voting rights in the election of directors under normal circumstances. Wholly-Owned Subsidiary means, as to any Person, another Person all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) The term "including" is not limiting and means" including without limitation." (d) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding"; and the word "through" means "to and including." (e) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation. (f) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms. (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Borrower, the 16 Company, the Lenders and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against the Agent or the Lenders merely because of the Agent's or Lenders' involvement in their preparation. (h) All references in this Agreement or any other Loan Document to financial statements or reports to be delivered with respect to the Company and its Subsidiaries shall, so long as the audited financial statements of Circuit City include separate audited financial statements for the CarMax Group, be deemed to be references to financial statements or reports of the CarMax Group. Compliance with the financial covenants in Section 9.6 hereof with respect to periods that are audited shall, so long as the audited financial statements of Circuit City include separate audited financial statements for the CarMax Group, be measured by reference to such audited financial statements of the CarMax Group. SECTION 2. COMMITMENTS OF THE LENDERS; BORROWING PROCEDURES; DRAFTING AGREEMENTS AND DRAFTS. 2.1 Commitments. On and subject to the terms and conditions of this Agreement, each of the Lenders, severally and for itself alone, agrees to make loans to the Borrower, and to issue and participate in Drafting Agreements and Drafts for the account of the Borrower or any Subsidiary (other than Unrestricted Subsidiaries and Excluded Subsidiaries) as follows: 2.1.1 Revolving Loan Commitment. (a) Each Revolving Lender agrees to make loans on a revolving basis ("Revolving Loans") to the Borrower from time to time until the Termination Date in such Revolving Lender's Revolving Percentage of such aggregate amounts as the Borrower may request, provided that (x) the Revolving Outstandings will not, at any time, exceed the Revolving Commitment Amount and (y) 130% of the Outstandings will not, at any time, exceed the Borrowing Base and (b) (i) the Fronting Lender agrees from time to time until the Termination Date to issue Drafting Agreements to Manufacturers for the account of the Borrower and any Subsidiary (other than Unrestricted Subsidiaries and Excluded Subsidiaries and except that, for so long as any Ford Restriction exists, the Fronting Lender shall not be obligated to enter into a Drafting Agreement with Ford), as more fully set forth in Sections 2.4 through 2.6, and to permit Manufacturers that are parties to Drafting Agreements to make Drafts on accounts of the Fronting Lender in accordance with such Drafting Agreements (it being understood that the Fronting Lender may, in its sole and absolute discretion, accept Drafts from Manufacturers and Auction Houses that are not parties to Drafting Agreements), and (ii) as more fully set forth in Section 2.7.2, each Revolving Lender agrees to purchase a participation in each such Drafting Agreement and each such Draft, provided that (x) the Revolving Outstandings will not at any time exceed the Revolving Commitment Amount and (y) 130% of the Outstandings will not, at any time, exceed the Borrowing Base. As more fully described in Section 2.7.1(a), the Borrower agrees to reimburse the Fronting Lender for each Draft made against it and each reimbursement obligation of the Borrower with respect thereto shall be automatically refunded with a Revolving Loan. 2.1.2 Term Loan Commitment. Each Term Lender made a term loan (the "Term Loans") to the Borrower on the Initial Closing Date in such Term Lender's Term Percentage of $100,000,000. It is understood and agreed that the Term Loans were disbursed to the Borrower 17 under the Existing Credit Agreement and that no other Term Loans will be made available to the Borrower under this Agreement. 2.1.3 Swing Line Loans. Subject to the terms and conditions of this Agreement, the Fronting Lender may from time to time, in its sole and absolute discretion, make loans to the Borrower (collectively the "Swing Line Loans" and individually each a "Swing Line Loan") in an aggregate amount not at any time exceeding $200,000,000; provided that (x) the Revolving Outstandings will not at any time exceed the Revolving Commitment Amount and (y) 130% of the Outstandings will not, at any time, exceed the Borrowing Base. Swing Line Loans may be made by the Fronting Lender notwithstanding the fact that such Loans, when aggregated with the Fronting Lender's outstanding Revolving Loans, exceeds its Revolving Commitment. 2.2 Loan Procedures. The Borrower may request a Loan (and in the case of a Draft presented under clause (i) and a Swing Line Loan funded pursuant to the EFT System under clause (iii), the Borrower shall be deemed to have requested a Loan) (i) subject to Sections 2.4 through 2.7, in the case of a Draft presented by a Manufacturer or an Auction House to the Fronting Lender (it being understood that the Fronting Lender may, but shall have no obligation to, accept any Draft presented by a Person not a party to any Drafting Agreement or accept any Draft presented otherwise than in accordance with the terms of a Drafting Agreement), (ii) in the case of Loans requested directly by the Borrower, only after delivery to the Agent of written and oral notice of such proposed borrowing as required pursuant to clause (b) below and (iii) in the case of Swing Line Loans, by following the Fronting Lender's EFT System policies and procedures, as communicated by the Fronting Lender to the Borrower from time to time. Borrowings are subject to the following and to the remaining provisions hereof: (a) Each notice of a proposed borrowing (other than in respect of Drafts presented to the Fronting Lender and in respect of Swing Line Loans) shall set forth the following information: (i) the proposed date of such borrowing, which shall be a Business Day; and (ii) the aggregate amount of such borrowing. (b) Each such notice of borrowing (other than pursuant to the presentation of a Draft and with respect to Swing Line Loans) shall be given by telephonic notice to the Agent by 10:00 a.m., Detroit time, one Business Day prior to the proposed date of such borrowing and shall be confirmed in writing (including by facsimile transmission) to the Agent by 1:00 p.m. on such Business Day. Any telephonic notice of borrowing received after 10:00 a.m., Detroit time, shall be deemed to have been delivered by 10:00 a.m., Detroit time, on the next Business Day. Each notice of borrowing shall be irrevocable. On the Business Day of receipt of any such notice of borrowing (provided that any telephonic notice received after 10:00 a.m., Detroit time, shall be deemed received on the next Business Day), the Agent shall notify each Lender holding a Revolving Commitment of such notice. Not later than 1:00 p.m., Detroit time, on the date of the proposed borrowing, each such Lender shall provide the Agent at the office specified by 18 the Agent with immediately available funds covering such Lender's applicable Percentage of such borrowing. (c) Notwithstanding the foregoing, if the Fronting Lender has, at the request of the Required Lenders or acting in its discretion according to the terms hereof, taken action to suspend or terminate Drafts pursuant to a Drafting Agreement and such Drafting Agreement has in fact been suspended or terminated in accordance with its terms, then, subject to the terms of such Drafting Agreement, the Fronting Lender shall not fund any Draft under such Drafting Agreement. (d) In the case of each borrowing pursuant to the presentation of a Draft, the applicable Manufacturer or Auction House must follow the Fronting Lender's direct Drafting procedures as established and modified from time to time. (e) All Swing Line Loans shall be made through the EFT System pursuant to the Fronting Lender's EFT System policies and procedures, as communicated by the Fronting Lender to the Borrower from time to time. 2.3 Title Documents. All original Manufacturer's invoices and title documents evidencing the ownership by the Company and its Subsidiaries of all of their Motor Vehicles, including the Manufacturer's Certificate, shall be maintained in safekeeping by the Company and its Subsidiaries in accordance with their standard operating policies and procedures as in effect on the Initial Closing Date or as modified from time to time with the consent of the Agent. If an Event of Default has occurred and is continuing, within three Business Days of request by the Agent, each of the Company and each Subsidiary, as the case may be, shall deliver or cause to be delivered all original invoices and title documents to the Agent and the Agent shall hold all original invoices and title documents received by it after such request. 2.4 Issuance of Drafting Agreements. Subject to the terms and conditions of this Agreement, the Fronting Lender shall, from time to time, upon the written request of the Borrower or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary), issue Drafting Agreements for the account of the Borrower or such Subsidiary; provided, that for so long as any Ford Restriction exists, the Fronting Lender shall not be obligated to enter into any Drafting Agreement with Ford. 2.5 Conditions to Issuance; Termination of Drafting Agreements prior to Termination Date. The Fronting Lender shall not be obligated to enter into or issue a Drafting Agreement unless, as of the date of such Drafting Agreement: (a) the Borrower or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary) requesting such Drafting Agreement shall have delivered to the Fronting Lender a written application and such other documentation as the Fronting Lender may reasonably request, and the terms of such documents and of the proposed Drafting Agreement shall satisfy the terms hereof and otherwise be satisfactory to the Fronting Lender; it being understood that, the Fronting Lender shall, within three Business Days after the Borrower has provided the Fronting Lender with the name of the Manufacturer to which such proposed Drafting Agreement relates, provide the Borrower 19 with the Drafting Agreement proposed by the Fronting Lender for such Manufacturer; and (b) the representations and warranties contained in this Agreement and in the other Loan Documents shall be true and correct in all material respects as if made on such date and, both immediately before and after issuance of such Drafting Agreement, no Unmatured Event of Default or Event of Default shall exist. Each application for a Drafting Agreement issued by the Borrower or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary) hereunder shall constitute certification by the Borrower of the matters set forth in the foregoing clauses (a) and (b), and the Fronting Lender shall be entitled to rely on such certification without further inquiry. Notwithstanding the foregoing, so long as any Ford Restriction exists, the Fronting Lender shall not be obligated to enter into any Drafting Agreement with Ford. The Fronting Lender shall take such action as necessary to terminate all Drafting Agreements and all other Drafting arrangements (whether written or oral) within five Business Days prior to the Termination Date. 2.6 Notice of Issuance of or Entering into Drafting Agreements. The Fronting Lender shall give notice to each Revolving Lender of the issuance of, or the entering into of, each Drafting Agreement not later than five Business Days after issuance of, or the entering into of, each such Drafting Agreement, attaching a copy of such Drafting Agreement, as issued or entered into. 2.7 Draft Procedures. 2.7.1 Generally. (a) Each Draft submitted by a Manufacturer or an Auction House shall constitute a notice of borrowing of a Revolving Loan, and upon the funding of each such Draft, the Fronting Lender shall be deemed to have disbursed to or on behalf of the Borrower, in payment of the obligations of the Borrower or the applicable Subsidiary in respect of such funded Draft, a Revolving Loan, bearing interest at the Interest Rate. The Borrower shall be irrevocably obligated to reimburse the Fronting Lender on demand for the amount of any Draft presented by a Manufacturer or an Auction House; provided, however that such reimbursement obligation shall be deemed satisfied by the funding of Revolving Loans with respect thereto and shall be subject to Section 2.7.3. (b) Notwithstanding anything to the contrary herein, the Borrower shall bear all risk of loss resulting from the payment of any Draft, or any resulting disbursement of a Revolving Loan, whether or not due to the negligence, misconduct or fraud of any Manufacturer or Auction House. (c) The Fronting Lender shall not be obligated to terminate or suspend the Drafting privileges of any Manufacturer or Auction House under any Drafting Agreement or pursuant to any other Drafting arrangement (whether in writing or oral) even though the aggregate amount of Drafts that may be presented by such Manufacturer or Auction House under such Drafting Agreement or pursuant to such other Drafting arrangement 20 may exceed the availability in effect (under such Drafting Agreement, such other Drafting arrangement or this Agreement) from time to time. Furthermore, (i) any limitation contained in any Drafting Agreement (whether in respect of daily Drafts to be presented or otherwise) or other Drafting arrangement is, for the purposes hereof, for informational purposes only and the Fronting Lender shall not be obligated to monitor or limit the amount of Drafts presented or honored on the basis of any such limitation and (ii) any right of the Fronting Lender, acting in its discretion and not at the direction or with the concurrence of the Required Lenders, to terminate or suspend Drafting privileges of any Manufacturer or Auction House or to otherwise exercise any right or remedy shall be for the sole benefit and protection of the Fronting Lender, and the Fronting Lender shall not owe any duty to any other Lender with respect to such rights or remedies or be required to exercise such rights or remedies to protect any other Lender. (d) The Fronting Lender (in its sole and absolute discretion) may, but shall have no obligation to, accept any Draft presented by a Person not a party to any Drafting Agreement and/or accept any Draft presented otherwise than in accordance with the terms of a Drafting Agreement. 2.7.2 Participations in Drafting Agreements and Drafts; Funding. Concurrently with the issuance of each Drafting Agreement and/or the funding of each Draft (other than the funding of any Draft that is a Fronting Lender Advance), the Fronting Lender shall be deemed to have sold and transferred to each Revolving Lender, and each Revolving Lender shall be deemed irrevocably and unconditionally to have purchased and received from the Fronting Lender, without recourse or warranty, an undivided interest and participation, to the extent of such Revolving Lender's Revolving Percentage, in such Drafting Agreement or funded Draft and the Borrower's reimbursement obligations with respect thereto, which participation shall be funded by each Revolving Lender making the Revolving Loans specified in this Section or otherwise funding its participation if Revolving Loans may not then be made. For the purposes of this Agreement, the unparticipated portion of each Drafting Agreement or funded Draft shall be deemed to be the Fronting Lender's "participation" therein. If the Fronting Lender makes any payment or disbursement under any Draft, the Revolving Lenders will, upon receipt of notice of such payment or disbursement from the Agent, immediately (and by no later than 2:00 p.m., Detroit time, on the Business Day of receipt of such notice if such Revolving Lender receives such notice by 10:00 a.m., Detroit time, on such Business Day, otherwise by 2:00 p.m., Detroit time, on the following Business Day) and without any request by or notice to the Borrower, provide for the payment of any reimbursement obligations due to the Fronting Lender by making Revolving Loans (in accordance with their respective Revolving Percentages) in the amount thereof, the proceeds of which Revolving Loans shall be paid to the Agent to be paid over to the Fronting Lender; provided that if for any reason the Revolving Lenders may not then make Revolving Loans, then instead of making Revolving Loans each Revolving Lender (other than the Fronting Lender) shall become immediately obligated to fund its participation in all funded Drafts and shall pay to the Agent for the account of the Fronting Lender an amount equal to such Revolving Lender's Revolving Percentage of such funded Drafts. Further, if, after the time any Fronting Lender Advance is made by the Fronting Lender, the Revolving Outstandings are less than the Revolving Commitment Amount, then, to the extent of such deficiency, such Fronting Lender Advance shall cease to be a Fronting Lender Advance and each Revolving Lender shall transfer to the Agent for the benefit of the Fronting Lender such Revolving Lender's Revolving 21 Percentage of such deficiency as a Revolving Loan (such advance of funds by such Revolving Lender shall be made to the Agent by 2:00 p.m., Detroit time, on the Business Day of receipt of the notice referred to below, if it receives notice from the Agent of such deficiency by 10:00 a.m., Detroit time, on such Business Day, otherwise such Revolving Lender shall transfer such funds by 2:00 p.m., Detroit time, on the following Business Day); provided that if for any reason the Revolving Lenders may not then make Revolving Loans, then instead of making Revolving Loans each Revolving Lender (other than the Fronting Lender) shall become immediately obligated to fund its participation in such Fronting Lender Advances that have ceased to be the same and shall pay to the Agent for the account of the Fronting Lender an amount equal to such Revolving Lender's Revolving Percentage of such Fronting Lender Advances that have ceased to be the same. The obligations of the Revolving Lenders set forth in the two immediately preceding sentences are irrevocable and unconditional as more fully set forth in Section 2.7.4. All interest that accrues or is earned on any Revolving Lender's participation interest in any funded Draft or Fronting Lender Advance prior to the date that such Revolving Lender fully funds such participation interest, as set forth above, shall be paid to and retained by the Fronting Lender for its own account. Until the Fronting Lender has been paid the full amount of any Revolving Lender's participation interest in any funded Draft or Fronting Lender Advance, any principal payments that are to be applied to such funded Draft or Fronting Lender Advance shall be paid to and retained by the Fronting Lender for its own account. Any Revolving Lender's failure to make available to the Agent its Revolving Percentage of any such payment or disbursement shall not relieve any other Revolving Lender of its obligation hereunder to make available to the Agent such other Revolving Lender's Revolving Percentage of such payment, but no Revolving Lender shall be responsible for the failure of any other Revolving Lender to make available to the Agent such other Revolving Lender's Revolving Percentage of any such payment or disbursement. 2.7.3 Obligations Absolute. The obligations of the Borrower to reimburse the Fronting Lender for Drafts accepted hereunder, and to repay any Revolving Loan funded to pay a Draft, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including: (a) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of any Draft or any Drafting Agreement or any other Drafting arrangement (whether in writing or oral) or any other amendment or waiver of or any consent to departure from any Loan Document; (c) the existence of any claim, set-off, defense or other right that the Company, the Borrower or any other Subsidiary may have at any time against any Manufacturer or Auction House or any other beneficiary or transferee of any Draft or Drafting Agreement or other Drafting arrangement (or any Person for whom any such beneficiary or such transferee may be acting), the Fronting Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the other Loan Documents or any unrelated transaction; (d) any Draft or any demand, certificate or other document presented to the Fronting Lender proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect, or any loss or delay in the transmission or otherwise of any document required in order to make a Draft; (e) any payment by the Fronting Lender on any Draft pursuant to any Drafting Agreement or other Drafting arrangement against presentation of a Draft or certificate that does not strictly comply with the terms of any Drafting Agreement or other Drafting arrangement or any payment made by the Fronting Lender under any Draft to any 22 trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver or other representative of a successor to any beneficiary or any transferee of any Draft, including any arising in connection with any bankruptcy or insolvency proceeding; (f) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from all or any of the obligations of the Borrower or any Subsidiary in respect of any Draft or Drafting Agreement or other Drafting arrangement; or (g) any other circumstance whatsoever that might otherwise constitute a defense available to, or discharge of, the Borrower or any Subsidiary; provided that the Borrower shall not be obligated to reimburse the Fronting Lender for a Draft accepted hereunder or to repay any Revolving Loan funded to pay such funded Draft if the Fronting Lender engaged in willful misconduct in accepting such Draft. For the avoidance of doubt, the following actions or failures to act shall not, in and of themselves, be willful misconduct by the Fronting Lender: (i) accepting a Draft without requesting or reviewing supporting documentation from the Person submitting such Draft, (ii) failing to monitor or limit the amount of Drafts presented or honored or (iii) providing incorrect information as to the availability in effect under any Drafting Agreement, any other Drafting Arrangement (whether in writing or oral) or this Agreement. 2.7.4 Participation Obligations Unconditional. Each Revolving Lender's obligation to make available to the Agent for the account of the Fronting Lender the amount of its participation interest in any funded Draft or Fronting Lender Advance as provided in Section 2.7.2 shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right that such Revolving Lender may have against the Fronting Lender or any other Person, (ii) the occurrence or continuance of an Event of Default or Unmatured Event of Default, (iii) any adverse change in the condition (financial or otherwise) of the Company or any Subsidiary thereof, (iv) any termination of the Commitments, (v) whether or not the conditions specified in Section 10 have been satisfied or (vi) any other circumstance, happening or event whatsoever. 2.7.5 Repayment of Participations. Upon (and only upon) receipt by the Agent for the account of the Fronting Lender of immediately available funds from or on behalf of the Borrower (a) in reimbursement of any funded Draft or Fronting Lender Advance with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender's participation therein or (b) in payment of any interest on a funded Draft or Fronting Lender Advance with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender's participation therein, the Agent will pay to such Revolving Lender its pro rata share (according to its Revolving Percentage) thereof (and the Fronting Lender shall receive the amount otherwise payable to any Revolving Lender which did not so pay the Agent the amount of such Revolving Lender's participation in such funded Draft or Fronting Lender Advance). All interest that accrues or is earned on any Revolving Lender's participation interest in any funded Draft or Fronting Lender Advance prior to the date that such Revolving Lender fully funds its participation interest, as set forth above in Section 2.7.2, shall be paid to and retained by the Fronting Lender for its own account. Until the Fronting Lender has been paid the full amount of any Revolving Lender's participation interest in any funded Draft or Fronting Lender Advance, any principal payments that are to be applied to such funded Draft or Fronting Lender Advance shall be paid to and retained by the Fronting Lender for its own account. 23 2.8 Swing Line Loan Procedures. 2.8.1 Generally. Concurrently with the making of each Swing Line Loan, the Fronting Lender shall be deemed to have sold and transferred to each Revolving Lender, and each Revolving Lender shall be deemed irrevocably and unconditionally to have purchased and received from the Fronting Lender, an undivided interest and participation, to the extent of such other Revolving Lender's Revolving Percentage, in such Swing Line Loan (but such participation shall remain unfunded until required to be funded pursuant to Section 2.8.2). 2.8.2 Refunding of, or Funding of Participations in, Swing Line Loans. The Fronting Lender may at any time, in its sole discretion, on behalf of the Borrower (which hereby irrevocably authorizes the Fronting Lender to act on its behalf) deliver a notice to the Agent requesting that each Revolving Lender (including the Fronting Lender in its individual capacity) make a Revolving Loan in such Revolving Lender's Revolving Percentage of the aggregate amount of Swing Line Loans outstanding on such date for the purpose of repaying all Swing Line Loans (and, upon receipt of the proceeds of such Revolving Loans, the Agent shall apply such proceeds to repay Swing Line Loans) (each Revolving Lender shall make its advance under this Section by no later than 2:00 p.m., Detroit time, on the Business Day of receipt of such notice of borrowing pursuant to this Section if such Revolving Lender receives such notice by 10:00 a.m., Detroit time, on such Business Day, otherwise by 2:00 p.m., Detroit time, on the following Business Day); provided that if for any reason the Revolving Lenders may not then make Revolving Loans, then instead of making Revolving Loans each Revolving Lender (other than the Fronting Lender) shall become immediately obligated to fund its participation in all outstanding Swing Line Loans and shall pay to the Agent for the account of the Fronting Lender an amount equal to such Revolving Lender's Revolving Percentage of such Swing Line Loans. Any Revolving Lender's failure to make available to the Agent its Revolving Percentage of the amount of all outstanding Swing Line Loans shall not relieve any other Revolving Lender of its obligation hereunder to make available to the Agent such other Revolving Lender's Revolving Percentage of such amount, but no Revolving Lender shall be responsible for the failure of any other Revolving Lender to make available to the Agent such other Revolving Lender's Revolving Percentage of any such amount. 2.8.3 Repayment of Participations. Upon (and only upon) receipt by the Agent for the account of the Fronting Lender of immediately available funds from or on behalf of the Borrower (a) in reimbursement of any Swing Line Loan with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender's participation therein or (b) in payment of any interest on a Swing Line Loan with respect to which a Revolving Lender has paid the Agent in full for the account of the Fronting Lender the amount of such Revolving Lender's participation therein, the Agent will pay to such Revolving Lender its pro rata share (according to its Revolving Percentage) thereof (and the Fronting Lender shall receive the amount otherwise payable to any Revolving Lender which did not so pay the Agent the amount of such Revolving Lender's participation in such Swing Line Loan). All interest that accrues or is earned on any Revolving Lender's participation interest in any Swing Line Loan prior to the date that such Revolving Lender fully funds its participation interest, as set forth above in Section 2.8.2, shall be paid to and retained by the Fronting Lender for its own account. Until the Fronting Lender has been paid the full amount of any Revolving Lender's participation interest in any Swing Line Loan, any principal payments 24 that are to be applied to such Swing Line Loan shall be paid to and retained by the Fronting Lender for its own account. 2.8.4 Participation Obligations Unconditional. Each Revolving Lender's obligation to make available to the Agent for the account of the Fronting Lender the amount of its participation interest in all Swing Line Loans as provided in Section 2.8.2 shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right that such Revolving Lender may have against the Fronting Lender or any other Person, (ii) the occurrence or continuance of an Event of Default or Unmatured Event of Default, (iii) any adverse change in the condition (financial or otherwise) of the Company or any Subsidiary thereof, (iv) any termination of the Commitments, (v) whether or not the conditions specified in Section 10 have been satisfied or (vi) any other circumstance, happening or event whatsoever. 2.9 Fronting Lender Advances. The Fronting Lender is authorized by the Borrower and the Lenders, from time to time in the Fronting Lender's sole and absolute discretion, to accept Drafts in an amount that would cause the Revolving Outstandings to exceed the Revolving Commitment Amount (the amount by which any such Draft would so cause the Revolving Outstandings to exceed the Revolving Commitment Amount being a "Fronting Lender Advance"). To the extent that the funding of any such Draft does not cause the Revolving Outstandings to exceed the Revolving Commitment Amount, no Fronting Lender Advance shall be created and such Draft shall constitute part of the Revolving Outstandings. The Fronting Lender Advances shall be secured by the Collateral Documents and guarantied under Section 14 and under the Guaranty. 2.10 Commitments Several. The failure of any Lender to make a requested Loan on any date shall not relieve any other Lender of its obligation (if any) to make a Loan on such date, but no Lender shall be responsible for the failure of any other Lender to make any Loan to be made by such other Lender. 2.11 Certain Conditions. Notwithstanding any other provision of this Agreement, no Lender shall have an obligation to make any Loan (other than Revolving Loans funded to pay to the Fronting Lender the participation obligations of the Revolving Lenders in respect of Drafts and Swing Line Loans and Revolving Loans to repay Fronting Lender Advances that have ceased to be the same, all as set forth above), and the Fronting Lender shall not have any obligation to issue any Drafting Agreement, fund any Draft or make a Swing Line Loan, if an Event of Default or Unmatured Event of Default has occurred and is continuing. 2.12 Extension of Termination Date. The Termination Date shall be automatically extended on each anniversary of the Initial Closing Date for one year unless the Borrower or any Lender shall notify the Agent in writing prior to such anniversary that it does not wish to extend the Termination Date for an additional year (such notice a "No-Extension Notice"). The Agent shall promptly provide written notice of its receipt of a No-Extension Notice to the other parties hereto. 25 SECTION 3. NOTES EVIDENCING LOANS. 3.1 Notes. The Loans of each Lender shall be evidenced by a promissory note (each a "Note") substantially in the form set forth in Exhibit A, with appropriate insertions, payable to the order of such Lender in full on the Termination Date; provided that no new Notes will be issued to the Lenders on the Amendment Effective Date as the promissory notes issued to the Lenders on the Initial Closing Date continue in full force and effect. 3.2 Recordkeeping. Each Lender shall record in its records, or at its option on the schedule attached to its Note, the date and amount of each Loan made by such Lender and each repayment thereof. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on such Note. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of the Borrower hereunder or under any Note to repay the principal amount of the Loans evidenced by such Note together with all interest accruing thereon. SECTION 4. INTEREST. 4.1 Interest Rate. The Borrower promises to pay interest on the unpaid principal amount of each Loan for the period commencing on the date of such Loan until such Loan is paid in full at the applicable Interest Rate. 4.2 Interest Payment Dates. Accrued interest on each Loan shall be payable in arrears for each month on the 10th Business Day of the next succeeding month and at maturity. After maturity (whether as a result of acceleration or otherwise), accrued interest on all Loans shall be payable on demand. 4.3 Computation of Interest. Interest shall be computed for the actual number of days elapsed on the basis of a year of 360 days. SECTION 5. FEES. 5.1 Agent's Fee. Each Lender hereto that is not DCSNA acknowledges and agrees that the Agent may deduct from interest payments received by it from the Borrower an amount equal to 0.15% per annum of the daily unpaid principal amount of the Loans of such Lender for the period from the later of the Amendment Effective Date or the last day on which such fee was paid to the date the Agent receives such interest as payment of the Agent's fee hereunder, and that all payments of interest to such Lenders by the Agent shall be net of such amount; it being understood and agreed that prior to the Amendment Effective Date, the reference to 0.15% per annum was a reference to 0.10% per annum and that such percentage (i.e., 0.10% per annum) applied to the period prior to the Amendment Effective Date. 5.2 Computation of Fees. All fees hereunder shall be computed for the actual number of days elapsed on the basis of a year of 360 days. 26 SECTION 6. REDUCTION OR TERMINATION OF THE REVOLVING COMMITMENT AMOUNT; PREPAYMENTS. 6.1 Voluntary Reduction or Termination of Revolving Commitment Amount. The Borrower may from time to time on at least one Business Day's prior written notice to the Agent (which shall promptly advise each Lender thereof) permanently reduce the Revolving Commitment Amount to an amount not less than the Revolving Outstandings. Concurrently with any reduction of the Revolving Commitment Amount to zero, the Borrower shall pay all interest on the Revolving Loans and shall Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House. All reductions of the Revolving Commitment Amount shall reduce the Revolving Commitments pro rata among the Revolving Lenders according to their respective Revolving Percentages. 6.2 Voluntary Prepayments. The Borrower may, with no advance notice, from time to time prepay the Revolving Loans, Swing Line Loans and Fronting Lender Advances, if such prepayment is effected through the EFT System (it being understood and agreed that payments through the EFT System must be entered and transmitted by no later than 3:00 p.m., Detroit time, on a Business Day); provided that if the Borrower makes a prepayment on the Revolving Loans, Swing Line Loans or Fronting Lender Advances other than through the EFT System or, if the Revolving Outstandings immediately prior to such prepayment exceed $100,000,000, in an amount that would reduce the Revolving Outstandings to (or to an amount less than) $100,000,000 (even if such payment is effected through the EFT System), it must give the Agent notice no later than 12:00 p.m., Detroit time, on the Business Day prior to the date of such prepayment; provided, further, that all prepayments pursuant to this sentence may be made without premium or penalty and are permitted to be made in order to prepay the Revolving Loans, Swing Line Loans and Fronting Lender Advances, in whole or in part. The Borrower may, by giving notice to the Agent no later than 12:00 p.m., Detroit time, on the Business Day prior to the date of prepayment, but only if no Fronting Lender Advances, Swing Line Loans or Revolving Loans are outstanding, prepay the entire (but not less than the entire) outstanding principal amount of the Term Loans, without premium or penalty. Each prepayment pursuant to this Section shall be made together with accrued and unpaid interest to the date of such prepayment on the principal amount paid. Reference is made to Section 7.2 for the application of prepayments pursuant to this Section. 6.3 Mandatory Prepayments. (a) If on any day 130% of the Outstandings exceeds the Borrowing Base, the Borrower shall, before the close of business on the following Business Day, prepay Loans in an amount sufficient to eliminate such excess or prepay Loans and/or Cash Collateralize all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) with Manufacturers and Auction Houses in an amount determined by the Agent in its sole and absolute discretion. (b) If on any day on which the Revolving Commitment Amount is reduced pursuant to Section 6.1, the Revolving Outstandings exceed the Revolving Commitment Amount, the Borrower shall immediately prepay Revolving Loans in an amount sufficient to eliminate such excess or prepay Revolving Loans and/or Cash Collateralize all Drafting Agreements and all 27 other Drafting arrangements (whether in writing or oral) with Manufacturers and Auction Houses in an amount determined by the Agent in its sole and absolute discretion. SECTION 7. MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES. 7.1 Making of Payments. All payments by the Borrower of (a) interest on any Loans and (b) principal on any Fronting Lender Advance, Swing Line Loan or Revolving Loan, may be effected through the EFT System by 3:00 p.m., Detroit time, on the date due; provided that if the Borrower makes a payment of interest on any Loan or a payment of principal on any Fronting Lender Advance, Swing Line Loan or Revolving Loan other than through the EFT System, such payment must be made by the Borrower to the Agent in immediately available funds at the office specified by the Agent not later than 12:00 p.m., Detroit time, on the date due and funds received after that hour shall be deemed to have been received by the Agent on the following Business Day. All payments of principal on the Term Loans must be made by the Borrower to the Agent in immediately available funds at the office specified by the Agent not later than 12:00 p.m., Detroit time, on the date due; provided that the Borrower will be permitted to make payments of principal on the Term Loans through the EFT System if (i) the Borrower gives the Agent notice of its intention to effect such payment through the EFT System at least two Business Days prior to the date of such payment (and specifies in such notice the date such payment is to be made, which shall be a Business Day) and (ii) such payment is effected through the EFT System not later than 12:00 p.m., Detroit time, on the date specified in such notice. The Agent shall promptly remit to each Lender its share of all such payments received in collected funds by the Agent for the account of such Lender. 7.2 Application of Certain Payments. 7.2.1 At all times that an Event of Default does not exist, each payment of principal (including prepayments under Section 6.2 or 6.3) shall be applied first, to Fronting Lender Advances, second, to Swing Line Loans and funded Drafts for which Revolving Lenders have not yet funded their participations, third, to the Revolving Loans and fourth, to Term Loans. Concurrently with each remittance to any Lender of its share of any such payment, the Agent shall advise such Lender as to the application of such payment. 7.2.2 Any payment made by the Borrower, at any time that the Revolving Outstandings immediately prior to such payment exceed $100,000,000, that would reduce the Revolving Outstandings to (or to an amount less than) $100,000,000 shall be deemed to have been received by the Agent on the Business Day immediately following the date such payment is received by the Agent, unless the Agent receives one Business Day's prior notice of such payment in accordance with Section 6.2. 7.3 Due Date Extension. If any payment of principal or interest with respect to any of the Loans, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension. 7.4 Setoff. The Company and the Borrower agree that the Agent and each Lender have all rights of set-off provided by applicable law, and in addition thereto, the Company and the 28 Borrower agree that at any time any Event of Default or Unmatured Event of Default exists, the Agent and each Lender may apply to the payment of any obligations of the Borrower hereunder, whether or not then due, any and all balances, credits, deposits, accounts or moneys of the Company and the Borrower then or thereafter with the Agent or such Lender. The Agent or the Lender exercising the set-off shall promptly notify the Company or the Borrower, as the case may be, thereof after making such exercise; provided that failure to give such notice shall not affect the validity of the set-off. 7.5 Proration of Payments. Except to the extent that this Agreement provides for payments to be allocated to Lenders under a particular credit facility hereunder, if any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise, but excluding any payment pursuant to Section 13.9) on account of principal of or interest on any Loan (or on account of its exposure under any Draft or Drafting Agreement) in excess of its pro rata share of payments and other recoveries obtained by all Lenders on account of principal of and interest on the Loans then held by them, such Lender shall purchase from the other Lenders such participations in the Loans (or subparticipations in Drafts and Drafting Agreements) held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery. 7.6 Taxes. All payments of principal of, and interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, excluding franchise taxes and taxes imposed on or measured by any Lender's net income or receipts (all non-excluded items being called "Taxes"). If any withholding or deduction from any payment to be made by the Borrower or the Company hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower or the Company, as applicable, will: (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority; and (c) pay to the Agent for the account of the Lenders such additional amount as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Agent or any Lender with respect to any payment received by the Agent or such Lender hereunder, the Agent or such Lender may pay such Taxes and the Borrower or the Company, as applicable, will promptly pay such additional amounts (including any penalty, interest or expense) as is necessary in order that the net amount received by such Person after the payment of such Taxes (including any Taxes on such 29 additional amount) shall equal the amount such Person would have received had such Taxes not been asserted. If the Borrower or the Company, as applicable, fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower or the Company, as applicable, shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this Section 7.6, a distribution hereunder by the Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Borrower. Each Lender that (a) is organized under the laws of a jurisdiction other than the United States of America or a state thereof and (b)(i) is a party hereto on the Amendment Effective Date or (ii) becomes an assignee of an interest under this Agreement under Section 13.9.1 after the Amendment Effective Date (unless such Lender was already a Lender hereunder immediately prior to such assignment) shall execute and deliver to the Borrower and the Agent one or more (as the Borrower or the Agent may reasonably request) United States Internal Revenue Service Form W-8ECI or Form W-8BEN or such other forms or documents, appropriately completed, as may be applicable to establish that such Lender is exempt from withholding or deduction of Taxes. The Borrower shall not be required to pay additional amounts to any Lender pursuant to this Section 7.6 to the extent that the obligation to pay such additional amounts would not have arisen but for the failure of such Lender to comply with this paragraph. SECTION 8. WARRANTIES. To induce the Agent and the Lenders to enter into this Agreement and to induce the Lenders to make Loans hereunder and participate in Drafting Agreements issued hereunder and Drafts, and the Fronting Lender to issue Drafting Agreements hereunder and fund Drafts presented to it, each of the Borrower and the Company warrants to the Agent and the Lenders that: 8.1 Organization. The Company is a corporation validly existing and in good standing under the laws of the Commonwealth of Virginia; each Subsidiary of the Company is validly existing and in good standing under the laws of the jurisdiction of its organization; and each of the Company and each Subsidiary is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect. 8.2 Authorization; No Conflict. Each of the Borrower, the Company and each other Loan Party is duly authorized to execute and deliver each Loan Document to which it is a party, the Borrower is duly authorized to borrow monies hereunder and each of the Borrower, the Company and each other Loan Party is duly authorized to perform its obligations under each Loan Document to which it is a party. The execution, delivery and performance by each of the Borrower and the Company of this Agreement and by each of the Borrower, the Company and each other Loan Party of each other Loan Document to which it is a party, and the borrowings by the Borrower hereunder, do not and will not (a) require any consent or approval of any 30 governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law, (ii) the charter, by-laws or other organizational documents of the Borrower, the Company or any other Loan Party or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon the Borrower, the Company or any other Loan Party or any of their respective properties or (c) require, or result in, the creation or imposition of any Lien on any asset of the Borrower, the Company, any Subsidiary or any other Loan Party (other than Liens in favor of the Agent created pursuant to the Collateral Documents). 8.3 Validity and Binding Nature. Each of this Agreement and each other Loan Document to which the Borrower, the Company or any other Loan Party is a party is the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors' rights generally and to general principles of equity. 8.4 Financial Condition. The audited consolidated financial statements of the CarMax Group as at February 28, 2001 and the unaudited consolidated condensed financial statements of the CarMax Group as at November 30, 2001, copies of each of which have been delivered to the Agent for distribution to each Lender, were prepared in accordance with GAAP (subject, in the case of such unaudited financial statements, to normal year-end audit adjustments) and present fairly the consolidated financial condition of the CarMax Group as at such dates and the results of its operations for the periods then ended. 8.5 No Material Adverse Change. Since November 30, 2001 there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Company and its Subsidiaries taken as a whole (it being understood that the separation of the CarMax Group from Circuit City shall not be considered an adverse change). 8.6 Litigation and Contingent Liabilities. No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to the knowledge of the Borrower or the Company, threatened against the Company or any Subsidiary which might reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 8.6. Other than any liability incident to such litigation or proceedings, neither the Company nor any Subsidiary has any contingent liabilities not listed on Schedule 8.6. 8.7 Ownership of Properties; Liens. Each of the Company and each Subsidiary owns good and, in the case of real property, marketable title to all of its properties and assets material to its business, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) except for Permitted Liens. 8.8 Subsidiaries. As of the Amendment Effective Date, neither the Borrower nor the Company has any Subsidiaries other than those listed on Schedule 8.8. 8.9 Pension Plans. (a) During the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement or the making of any Loan or the issuance of any 31 Drafting Agreement, (i) no steps have been taken to terminate any Pension Plan and (ii) no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which could result in the incurrence by the Company or any Subsidiary of any liability, fine or penalty that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. (b) All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by the Company or any other member of the Controlled Group under the terms of the plan or of any collective bargaining agreement or by applicable law; neither the Company nor any member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, might result in a withdrawal or partial withdrawal from any such plan; and neither the Company nor any member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent. 8.10 Investment Company Act. Neither the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940. 8.11 Public Utility Holding Company Act. Neither the Company nor any Subsidiary is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935. 8.12 Regulation U. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. 8.13 Taxes. Each of the Company and each Subsidiary has filed all Federal and other material tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. 8.14 Solvency, etc. On the Amendment Effective Date, and immediately prior to and after giving effect to the issuance of each Drafting Agreement and each borrowing hereunder and the use of the proceeds thereof, (a) each of the Borrower's, the Company's and each other Loan Party's assets will exceed its liabilities and (b) each of the Borrower, the Company and each other Loan Party will be solvent, will be able to pay its debts as they mature, will own property with fair saleable value greater than the amount required to pay its debts and will have capital sufficient to carry on its business as then constituted. 32 8.15 Environmental Matters. (a) No Violations. Except as set forth on Schedule 8.15, neither the Company nor any Subsidiary, nor any operator of the Company's or any Subsidiary's properties, is in violation, or alleged violation, of any judgment, decree, order, law, permit, license, rule or regulation pertaining to Environmental Matters, including those arising under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986 or any other Environmental Law which individually or in the aggregate might reasonably be expected to have a Material Adverse Effect. (b) Notices. Except as set forth on Schedule 8.15 and for matters arising after the Amendment Effective Date, neither the Company nor any Subsidiary has received notice from any third party, including any Federal, state or local governmental authority, of any of the following that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect: (i) that any one of them has been identified by the U.S. Environmental Protection Agency as a potentially responsible party under CERCLA with respect to a site listed on the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that any hazardous waste, as defined by 42 U.S.C. Section 6903(5), any hazardous substance as defined by 42 U.S.C. Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section 9601(33) or any toxic substance, oil or hazardous material or other chemical or substance regulated by any Environmental Law (all of the foregoing, "Hazardous Substances") which any one of them has generated, transported or disposed of has been found at any site at which a Federal, state or local agency or other third party has conducted a remedial investigation, removal or other response action pursuant to any Environmental Law; (iii) that the Company or any Subsidiary must conduct a remedial investigation, removal, response action or other activity pursuant to any Environmental Law; or (iv) of any Environmental Claim for which the Company or any Subsidiary may be liable. (c) Handling of Hazardous Substances. Except as set forth on Schedule 8.15, (i) no portion of the real property or other assets of the Company or any Subsidiary has been used for the handling, processing, storage or disposal of Hazardous Substances except in substantial compliance with applicable Environmental Laws and no underground tank or other underground storage receptacle for Hazardous Substances is located on such properties; (ii) in the course of any activities conducted by the Company, any Subsidiary or the operators of any real property of the Company or any Subsidiary, no Hazardous Substances have been generated or are being used on such properties except in substantial compliance with applicable Environmental Laws; (iii) there have been no Releases or threatened Releases of Hazardous Substances on, upon, into or from any real property or other assets of the Company or any Subsidiary, which Releases singly or in the aggregate might reasonably be expected to have a Material Adverse Effect; (iv) there have been no Releases on, upon, from or into any real property in the vicinity of the real property or other assets of the Company or any Subsidiary which, through soil or groundwater contamination, may have come to be located on, and which might reasonably be expected to have a Material Adverse Effect; and (v) any Hazardous Substances generated by the Company and its Subsidiaries have been transported offsite only by properly licensed carriers and delivered only to treatment or disposal facilities maintaining valid permits as required under applicable Environmental Laws, which transporters and facilities have been and are operating in 33 compliance with such permits and applicable Environmental Laws, except where any violation of this clause (v) could not reasonably be expected to have a Material Adverse Effect. 8.16 Insurance. Set forth on Schedule 8.16 is a complete and accurate summary of the property and casualty insurance program of the Company and its Subsidiaries as of the Amendment Effective Date (including the names of all insurers, policy numbers, expiration dates, amounts and types of coverage and a description in reasonable detail of any self-insurance program, retrospective rating plan, fronting arrangement or other risk assumption arrangement involving the Company or any Subsidiary). 8.17 Information. All information heretofore or contemporaneously herewith furnished in writing by the Borrower, the Company or any other Loan Party to the Agent or any Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of the Company or any Subsidiary to the Agent or any Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by the Agent and the Lenders that any projections and forecasts provided by the Company are based on good faith estimates and assumptions believed by the Company to be reasonable as of the date of the applicable projections or forecasts and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results). 8.18 Intellectual Property. The Company and each Subsidiary owns and possesses or has a license or other right to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the business of the Company and its Subsidiaries, without any infringement upon rights of others, except to the extent that failure to comply with any of the foregoing could not reasonably be expected to have a Material Adverse Effect. 8.19 Burdensome Obligations. Neither the Company nor any Subsidiary is a party to any agreement or contract or subject to any corporate, limited liability company or partnership restriction which might reasonably be expected to have a Material Adverse Effect. 8.20 Labor Matters. Except as set forth on Schedule 8.20, neither the Company nor any Subsidiary is subject to any labor or collective bargaining agreement. There are no existing or threatened strikes, lockouts or other labor disputes involving the Company or any Subsidiary that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Company and its Subsidiaries are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters. 8.21 No Default. No Event of Default or Unmatured Event of Default exists or would result from the incurring by the Borrower of any Indebtedness hereunder or under any other Loan Document. 34 8.22 Engaged in Motor Vehicle Sales. (a) The Company and its Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries) are engaged, directly or indirectly, in the business of selling, or selling and leasing, New Motor Vehicles and Used Motor Vehicles and in businesses ancillary thereto. (b) All such Motor Vehicles consist solely of goods held by the Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries) for sale, or for sale and lease; no sales or other transactions involving such Motor Vehicles are (nor shall they become) subject to set-off, counterclaim, defense, allowance or adjustment (other than warranty claims, the aggregate amount of which shall not be material); there is no Lien on any Motor Vehicle (other than Permitted Liens of the type specified in clauses (i), (ii), (iii) and (x) of the definition of "Permitted Liens") and there is no financing statement or similar statement or instrument of registration under the laws of any jurisdiction, covering or purporting to cover any interest of any kind in any Motor Vehicle or (except with respect to Permitted Liens) their proceeds on file or registered in any public office other than a financing statement in favor of the Agent and the financing statements identified on Schedule 8.22; there is no other floor plan or other financing arrangement relating to Motor Vehicles with any party other than pursuant to this Agreement; and none of the Company nor any of its Subsidiaries has made any other verbal or written contract or arrangement of any kind, the performance of which by the other party thereto would give rise to a Lien against any such Motor Vehicle (except for Permitted Liens of the type described in clauses (i), (ii), (iii) and (x) of the definition of "Permitted Lien") or, except for Permitted Liens, the proceeds thereof; all such Motor Vehicles are free from damage caused by fire or other casualty, unless covered by insurance, subject to customary deductibles. 8.23 Dealer Franchise Agreements; Material Business Relationships. As of the Amendment Effective Date, neither the Company nor any of its Subsidiaries is a party to any dealer franchise agreement ("Dealer Franchise Agreements") other than those specifically disclosed in Schedule 8.23, which schedule shows the Manufacturer and the Company or the Subsidiary, as the case may be, that is a party to each such agreement, the date such agreement was entered into and the expiration date of such agreement. Each of such Dealer Franchise Agreements is currently in full force and effect, and neither the Company nor any Subsidiary has received any notice of termination with respect to any such agreement; and, except as disclosed on Schedule 8.23, neither the Company nor any Subsidiary is aware of any event which with notice, lapse of time or both would allow any Manufacturer that is a party to any Dealer Franchise Agreement to terminate any such agreement. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between the Company or any of its Subsidiaries and any customer or any group of customers or with any Manufacturer which, in any case, could reasonably be expected to have a Material Adverse Effect. SECTION 9. COVENANTS. Until the expiration or termination of the Commitments and thereafter until all obligations of the Borrower and the Company hereunder and under the other Loan Documents are paid in full and all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) have been terminated, each of the Borrower and the Company agrees that, unless 35 at any time the Required Lenders shall otherwise expressly consent (except as provided in Section 13.1) in writing, it will: 9.1 Reports, Certificates and Other Information. Furnish to the Agent (which shall promptly provide copies to each Lender): 9.1.1 Annual Report. Promptly when available and in any event within 90 days after the close of each Fiscal Year, a copy of the annual audit report of the Company and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets and statements of earnings and cash flows of the Company and its Subsidiaries for such Fiscal Year, audited (without any qualification arising from the scope of the audit or as to the ability of the Company and its Subsidiaries to operate as a going concern) by independent auditors of recognized standing selected by the Company and reasonably acceptable to the Required Lenders, together with (i) a written statement from such accountants to the effect that, in making the examination necessary for the issuance of their opinion on such financial statements, nothing came to their attention that caused them to believe that the Company was not in compliance with any provision of Section 9.6, 9.7, 9.9 or 9.24 of this Agreement insofar as such provision relates to accounting matters or, if something has come to their attention that caused them to believe that the Company was not in compliance with any such provision, describing such non-compliance in reasonable detail and (ii) a comparison with the previous Fiscal Year. 9.1.2 Interim Reports. (a) Promptly when available and in any event within 45 days after the end of each Fiscal Quarter (except the last Fiscal Quarter of each Fiscal Year), consolidated balance sheets of the Company and its Subsidiaries as of the end of such Fiscal Quarter, together with consolidated statements of earnings and cash flows for such Fiscal Quarter and for the period beginning with the first day of such Fiscal Year and ending on the last day of such Fiscal Quarter, together with a comparison with the corresponding period of the previous Fiscal Year, certified by the chief financial officer or treasurer of the Company; and (b) promptly when available and in any event within 30 days after the end of each month (except the last month of each Fiscal Quarter), a report of assets and liabilities, substantially in the form of Exhibit J hereto, for each store location as of the last day of such month, certified by the chief financial officer or treasurer of the Company. 9.1.3 Compliance Certificates. Contemporaneously with the furnishing of a copy of each annual audit report pursuant to Section 9.1.1 and each set of quarterly statements pursuant to Section 9.1.2(a), a duly completed compliance certificate in the form of Exhibit B, with appropriate insertions, dated the date of such annual report or such quarterly statements and signed by the chief financial officer or the treasurer of the Company, containing a computation of each of the financial ratios and restrictions set forth in Section 9.6, a calculation of the amount of Financed Capital Expenditures incurred during the period covered by such certificate and the amount of Financed Capital Expenditures incurred during the period from the Initial Closing Date through the end of the period covered by such certificate and a statement to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it. 36 9.1.4 Reports to the SEC and to Shareholders. Promptly upon the filing or sending thereof, copies of all regular, periodic or special reports of the Company or any Subsidiary (other than Unrestricted Subsidiaries) filed with the SEC; copies of all registration statements of the Company or any Subsidiary (other than Unrestricted Subsidiaries) filed with the SEC (other than on Form S-8); and copies of all proxy statements or other communications made to security holders of the Company generally. 9.1.5 Notice of Default, Litigation and ERISA Matters. Promptly upon the Borrower or the Company obtaining knowledge of any of the following, written notice describing the same and the steps being taken by the Company or the Subsidiary affected thereby with respect thereto: (a) the occurrence of an Event of Default or an Unmatured Event of Default; (b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Borrower or the Company to the Lenders which has been instituted or, to the knowledge of the Borrower or the Company, is threatened against the Company or any Subsidiary or to which any of the properties of any thereof is subject which might reasonably be expected to have a Material Adverse Effect; (c) the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Company furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan) that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect, or any material increase in the contingent liability of the Company with respect to any post-retirement welfare plan benefit, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent; (d) any cancellation (unless contemporaneously replaced with similar coverage) or material change in any Property Insurance or any insurance for bodily injury, personal injury or property damage, in each case securing Motor Vehicles, maintained by the Company or any Subsidiary; (e) any material violation of law by the Company or any Subsidiary; or (f) any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any 37 law, rule or regulation) which might reasonably be expected to have a Material Adverse Effect. 9.1.6 Borrowing Base Certificates. Within 10 days of the end of each month, a Borrowing Base Certificate dated as of the end of such month (and, from time to time as the Agent may request, a Borrowing Base Certificate dated as of a date after the date of such request) and executed by the chief financial officer or the treasurer of the Company on behalf of the Company (provided that (i) the Company may deliver a Borrowing Base Certificate more frequently if it chooses and (ii) at any time an Event of Default exists, the Agent may require the Company to deliver Borrowing Base Certificates more frequently). 9.1.7 Management Reports. Promptly upon receipt thereof, copies of all detailed financial and management reports submitted to the Company by independent auditors in connection with each audit made by such auditors of the books of the Company, to the extent such reports identify a material weakness in the Company's internal controls. 9.1.8 Subordinated Debt Notices. Promptly from time to time, copies of any notices (including notices of default or acceleration) received from any holder or trustee of, under or with respect to any Subordinated Debt (other than such notices that are purely administrative in nature). 9.1.9 Manufacturer/Dealer Statements. Upon request of the Agent, copies of each Manufacturer/Dealer Statement of the Company and each Subsidiary. 9.1.10 Inventory Detail Report. Within 15 days of the end of each Fiscal Quarter, reports as to the Motor Vehicles of the Company and its Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries), which reports shall include inventory agings, inventory turns, WIP and title aging reporting and shall be in substantially the form of Exhibit M hereto. 9.1.11 Dealer Franchise Agreements. Promptly upon the Borrower or the Company obtaining knowledge thereof, notice of the termination of any Dealer Franchise Agreement. 9.1.12 Other Information. Promptly from time to time, such other information concerning the Company and its Subsidiaries as any Lender or the Agent may reasonably request; provided that this subsection shall apply to Unrestricted Subsidiaries only to the extent reasonably required by the Agent to monitor capital contributions to, and Investments in, Unrestricted Subsidiaries. 9.2 Books, Records and Inspections. Keep, and cause each Subsidiary to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; permit, and cause each Subsidiary (other than Unrestricted Subsidiaries, except to the extent reasonably required by the Agent to monitor capital contributions to, and Investments in, Unrestricted Subsidiaries and compliance with Section 9.24) to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), any Lender or the Agent or any representative thereof to audit and inspect the properties and operations of the Company or such Subsidiary (to the extent the Agent determines (in its sole discretion) such operations relate to the acquisition, administration and disposition of inventory, or to other matters concerning the creditworthiness 38 of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) or the ability of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) to perform its payment and other obligations hereunder and under the other Loan Documents); and permit, and cause each Subsidiary (other than Unrestricted Subsidiaries, except to the extent reasonably required by the Agent to monitor capital contributions to, and Investments in, Unrestricted Subsidiaries and compliance with Section 9.24) to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists), any Lender or the Agent or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and each of the Borrower and the Company hereby authorizes such independent auditors to discuss such financial matters with any Lender or the Agent or any representative thereof), and to examine (and, at the expense of the Company or such Subsidiary, photocopy extracts from) any of its books or other records (to the extent the Agent determines (in its sole discretion) such books and records relate to the acquisition, administration and disposition of inventory, or to other matters concerning the creditworthiness of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) or the ability of the Borrower, the Company or any Subsidiary (other than an Unrestricted Subsidiary) to perform its payment and other obligations hereunder and under the other Loan Documents); and permit, and cause each Subsidiary (other than Unrestricted Subsidiaries and Excluded Subsidiaries) to permit, at any reasonable time and with reasonable notice (or at any time without notice if an Event of Default exists) the Agent and its representatives to audit and inspect the Motor Vehicles of the Company and such Subsidiaries and to inspect, audit, check and make copies of and extracts from the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to such Motor Vehicles and any other collateral under the Collateral Documents. All such inspections or audits shall be at the Agent's expense, unless an Event of Default has occurred and is continuing, in which case such inspections and audits shall be at the Company's expense. 9.3 Maintenance of Property; Insurance. (a) Keep, and cause each Subsidiary (other than Unrestricted Subsidiaries) to keep, all property useful and necessary in the business of the Company or such Subsidiary in good working order and condition, ordinary wear and tear excepted. (b) Maintain, and cause each Subsidiary (other than Unrestricted Subsidiaries) to maintain, with responsible insurance companies, such insurance as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent (including commercially reasonable deductibles) and against such hazards and liabilities, as is customarily maintained by companies similarly situated; and, upon request of the Agent or any Lender, furnish to the Agent or such Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by the Company and its Subsidiaries (other than Unrestricted Subsidiaries). The Company shall cause each issuer of each policy of Property Insurance or insurance for bodily injury, personal injury or property damage, in each case insuring the Motor Vehicles of the Company and any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary), to provide the Agent with a certificate of insurance (with attached endorsement) (i) showing the Agent as lender's loss payee with respect to each policy of Property Insurance and naming the Agent and each Lender as an additional insured with respect to each policy of insurance for liability for bodily injury, personal injury or property damage, (ii) providing that 30 days' notice will be given to the Agent prior to any cancellation 39 of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to the Agent. Each of the Borrower and the Company shall, and the Company shall cause each Subsidiary (other than Unrestricted Subsidiaries and Excluded Subsidiaries) to, execute and deliver to the Agent a collateral assignment, in form and substance satisfactory to the Agent, of each business interruption insurance policy maintained by the Borrower, the Company or such Subsidiary; provided that no such collateral assignment shall be required as long as the Agent is named as loss payee under such business interruption insurance policy. 9.4 Compliance with Laws; Payment of Taxes and Liabilities. (a) Comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; and (b) pay, and cause each Subsidiary (other than an Unrestricted Subsidiary) to pay, prior to delinquency, all taxes and other governmental charges against it or any of its property, as well as claims of any kind which, if unpaid, might become a Lien on any of its property; provided that the foregoing shall not require the Borrower, the Company or such Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP. 9.5 Maintenance of Existence, etc. Maintain and preserve, and (subject to Section 9.10) cause each Subsidiary to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each other jurisdiction where the nature of its business makes such qualification necessary, except, in the case of this clause (b), in those instances in which the failure to be qualified or in good standing does not have a Material Adverse Effect; provided that the Company shall be permitted to dissolve Unrestricted Subsidiaries and Excluded Subsidiaries if such dissolution could not reasonably be expected to have a Material Adverse Effect. The Company shall notify the Agent of the dissolution of any Excluded Subsidiary not later than 10 days prior to the effective date of such dissolution and shall, upon request by the Agent, provide the Agent with evidence of pro forma compliance with all the financial ratios and restrictions set forth in Section 9.6 after giving effect to the dissolution of such Excluded Subsidiary. 9.6 Financial Covenants. 9.6.1 Current Ratio. Not permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities at any time to be less than 1.5:1.0. 9.6.2 Ratio of Total Liabilities to Consolidated Tangible Net Worth. Not permit the ratio of Total Liabilities to Consolidated Tangible Net Worth at any time to be greater than 2.0:1.0. 9.6.3 Fixed Charge Coverage Ratio. Not permit the Fixed Charge Coverage Ratio for any Computation Period to be less than 1.25:1.0. 9.7 Limitation on Indebtedness. Not, and not permit any Subsidiary (other than Unrestricted Subsidiaries) to, create, incur, assume or suffer to exist any Indebtedness, except: (a) obligations under this Agreement and the other Loan Documents; 40 (b) Indebtedness of Subsidiaries to the Company; (c) unsecured Indebtedness of the Company to Subsidiaries (other than Unrestricted Subsidiaries); (d) Subordinated Debt; (e) Hedging Obligations incurred for bona fide hedging purposes and not for speculation; (f) Indebtedness existing on the Initial Closing Date and described on Schedule 9.7 (including amounts available under commitments related thereto but not yet drawn upon) (the "Existing Indebtedness") and any Indebtedness extending the maturity of, or refunding or refinancing, such Existing Indebtedness, provided that (i) the principal amount of such Existing Indebtedness shall not be increased above the lesser of (x) the amount thereof immediately prior to such extension, refunding or refinancing (including amounts available under commitments related thereto but not yet drawn upon) and (y) the amount set forth across from such Indebtedness on Schedule 9.7 under the column "Current Balance", and (ii) the direct or contingent obligors therefor shall not be changed as a result of or in connection with such extension, refunding or refinancing; (g) Indebtedness secured by Liens permitted by clause (vi) of the definition of Permitted Liens, provided that the aggregate amount of all such Indebtedness at any time outstanding shall not exceed $5,000,000; and any Indebtedness extending the maturity of, or refunding or refinancing, such Indebtedness, provided that the principal amount of such Indebtedness shall not be increased above the amount thereof immediately prior to such extension, refunding or refinancing (including amounts available under commitments related thereto but not yet drawn upon), and the direct or contingent obligors therefor shall not be changed as a result of or in connection with such extension, refunding or refinancing; and (h) other Indebtedness, in addition to the Indebtedness listed above, in an aggregate principal amount not at any time exceeding $5,000,000. 9.8 Liens. Not, and not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any of its real or personal properties, assets or rights of whatever nature (whether now owned or hereafter acquired), except Permitted Liens; provided, however, that there shall be no Liens (including any Permitted Lien) on any Motor Vehicle other than Liens in favor of the Agent and Permitted Liens of the type described in clauses (i), (ii) and (iii) of the definition of "Permitted Liens." 9.9 Restricted Payments. Not, and not permit any Subsidiary (other than Unrestricted Subsidiaries) to, (a) make any distribution to any of its equity holders, (b) purchase or redeem any of its equity interests or any warrants, options or other rights in respect thereof, (c) make any redemption, prepayment, defeasance or repurchase of any Subordinated Debt, (d) make any payment of interest on account of any Subordinated Debt if immediately after giving effect to such interest payment, an Event of Default or Unmatured Event of Default would exist or (e) set aside funds for any of the foregoing. Notwithstanding the foregoing, (i) any Subsidiary may pay 41 dividends or make other distributions to the Company or to a Wholly-Owned Subsidiary (other than an Unrestricted Subsidiary), (ii) so long as no Event of Default or Unmatured Event of Default exists, the Company may pay dividends or make other distributions if immediately after such dividend or distribution it is in pro forma compliance with all the financial ratios and restrictions set forth in Section 9.6 (it being understood that, for purposes of calculating pro forma compliance with Section 9.6.3, the amount of such dividend or distribution shall be subtracted from EBITDAR), (iii) the Company may pay dividends payable solely in shares of common stock of the Company and (iv) the Company or any Subsidiary may purchase or redeem any of its common stock or any warrants, options or other rights in respect thereof from (A) employees, officers and directors of the Company or such Subsidiary (or their estates) upon the death, permanent disability, retirement or termination of employment of any such Person or otherwise in accordance with any stock incentive plan, employee stock purchase plan or other similar employee benefit plan maintained by the Company or such Subsidiary or (B) in the case of the Company, other stockholders of the Company so long as the purpose of such purchase or redemption is to acquire common stock in accordance with any such stock incentive plan, employee stock purchase plan or other similar employee benefit plan or for reissuance to new employees, officers or directors (or their estates) of the Company or any Subsidiary and such common stock is reissued within 12 months of such purchase or redemption, provided, in each case, that immediately after giving effect to such purchase or redemption under this clause (iv), (x) the Company is in pro forma compliance with all the financial ratios and restrictions set forth in Section 9.6 and (y) no Event of Default or Unmatured Event of Default exists. 9.10 Mergers, Consolidations, Sales; Use of Motor Vehicles as Inventory. Not, and not permit any Subsidiary to, be a party to any merger or consolidation, or purchase or otherwise acquire all or substantially all of the assets or any stock of any class of, or any membership or partnership or joint venture interest in, any other Person, or, except in the ordinary course of its business (which shall include sales or leases of Motor Vehicles), sell, transfer, convey, lease or assign all or any Substantial Portion of its Properties, or sell or assign with or without recourse any receivables, except for (a) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into, with or to the Company or into, with or to any other Wholly-Owned Subsidiary (other than an Unrestricted Subsidiary); (b) any such purchase or other acquisition by the Company or any Wholly-Owned Subsidiary (other than an Unrestricted Subsidiary) of the assets or stock of any Wholly-Owned Subsidiary; (c) transfers in the ordinary course of business of Motor Vehicle Receivables in connection with a Securitization of such Motor Vehicle Receivables owing (immediately prior to such transfer) to the Company or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary) and which Securitization is without recourse to the Company or such Subsidiary, other than Customary Recourse Arrangements; (d) so long as no Event of Default or Unmatured Event of Default shall exist or would be likely to result therefrom, transfers of Motor Vehicle Receivables (i) directly or (ii) indirectly through one or more SPEs other than in connection with a Securitization, provided that the consideration received by the Company or the applicable Subsidiary in any such transfer is in cash and is at least equal to the aggregate outstanding principal balance of the Motor Vehicle Receivables transferred and such consideration is deposited in the deposit account governed by the Control Agreement; (e) sales and dispositions of assets (including the stock of Subsidiaries) for at least fair market value (as determined by the Board of Directors of the Company) so long as the net book value of all assets sold or otherwise disposed of in any Fiscal Year of the Company does not exceed 10% of the net book value of the consolidated assets of 42 the Company and its Subsidiaries as of the last day of the preceding Fiscal Year; (f) any Acquisition by the Company or any Subsidiary if (1) immediately before and after giving effect to such Acquisition, no Event of Default or Unmatured Event of Default shall exist, (2) immediately after giving effect to such Acquisition, the Company is in pro forma compliance with all the financial ratios and restrictions set forth in Section 9.6, (3) in the case of the Acquisition of any Person, the Board of Directors of such Person has approved such Acquisition and (4) prior to and after such Acquisition, the Chief Financial Officer of the Company has delivered a certificate to the Agent confirming that the conditions set forth in clauses (1) - (3) above will be (in the case of a certificate delivered prior to such Acquisition) or have been (in the case of a certificate delivered after such Acquisition) met; and (g) so long as no Event of Default or Unmatured Event of Default shall exist or would result therefrom, sales of real property (and improvements thereon) acquired for the purpose of establishing new retail locations in sale leaseback transactions where the lease by the Company or the applicable Subsidiary of such sold property is an Operating Lease permitted hereunder, provided that the consideration received by the Company or the applicable Subsidiary in such sale is in cash and is at least equal to the lesser of the cost or the fair market value of the property sold (provided that such amount equals or exceeds the book value of such property). Notwithstanding the foregoing, neither the Borrower nor the Company shall, and the Company shall not permit any Subsidiary to (i) sell any Motor Vehicle other than in the ordinary course of business or (ii) permit any Motor Vehicle to be used for any purpose that would cause such Motor Vehicle to be characterized as equipment (as defined in the Uniform Commercial Code) without giving the Agent prior written notice that such Motor Vehicle is no longer in the Borrowing Base. 9.11 Modification of Organizational Documents. Not permit the Certificate or Articles of Incorporation, Certificate of Formation, By-Laws, Limited Liability Company Agreement or other organizational documents of the Company or any Subsidiary to be amended or modified in any way which might reasonably be expected to affect the interests of the Lenders in a materially adverse manner. 9.12 Use of Proceeds. Use the proceeds of the Loans, Drafts and the Drafting Agreements solely for the purpose of purchasing Motor Vehicles for the Company and its Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries) or for the purpose of reimbursing the Company or such Subsidiary for previously-incurred motor vehicle financing costs; and not use or permit any proceeds of any Loan to be used, either directly or indirectly, for any other purpose, including for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying" any Margin Stock. 9.13 Further Assurances. Take, and cause each Subsidiary (other than an Unrestricted Subsidiary) to take, such actions as are necessary or as the Agent or the Required Lenders may reasonably request from time to time (including the execution and delivery of guaranties, security agreements, financing statements and other documents, the filing or recording of any of the foregoing and the delivery of stock certificates and other collateral with respect to which perfection is obtained by possession) to ensure that (a) the obligations of the Borrower and the Company hereunder and under the other Loan Documents are guaranteed by all Subsidiaries (other than Unrestricted Subsidiaries) (including, promptly upon the acquisition or creation thereof, any Subsidiary (other than an Unrestricted Subsidiary) acquired or created after the date hereof) by execution of a counterpart of the Guaranty and (b) the obligations of the Company 43 and each of its Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries) (including each Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary) acquired or created after the date hereof) under the Loan Documents to which they are a party are secured by all Motor Vehicles, all rights of the Company and each such Subsidiary against Manufacturers arising out of or in connection with the purchase of Motor Vehicles, all Motor Vehicle Receivables (other than Motor Vehicle Receivables transferred in a Securitization or to an unaffiliated third party in the ordinary course of business), all rights to receive payment from any Person in connection with any transfer of a Motor Vehicle Receivable to such Person (but excluding any right of the Company or a Subsidiary to receive payments in its capacity as servicer of any such Motor Vehicle Receivable), all collections received by the Company and each such Subsidiary on account of any Motor Vehicle Receivable (other than Motor Vehicle Receivables transferred in a Securitization or to an unaffiliated third party in the ordinary course of business), all deposit accounts into which any payments or collections received by the Company or any Subsidiary on account of Motor Vehicle Receivables transferred to an unaffiliated third party in the ordinary course of business are paid, deposited or credited, and all proceeds thereof (other than Motor Vehicle Receivables transferred in a Securitization or to an unaffiliated third party in the ordinary course of business); provided that Kenosha shall not have to grant a Lien to the Agent to secure Kenosha's obligations under the Loan Documents on any New Motor Vehicles held by Kenosha of the Ford, Lincoln or Mercury makes for so long as any Ford Restriction exists. For the avoidance of doubt, (x) if an Excluded Subsidiary ceases to be such, it shall be required to comply with clause (b) above promptly after ceasing to be an Excluded Subsidiary and (y) if an Unrestricted Subsidiary ceases to be such, it shall be required to comply with this Section promptly after ceasing to be an Unrestricted Subsidiary. 9.14 Transactions with Affiliates. Not, and not permit any Subsidiary to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates (other than the Company and its Subsidiaries (other than Unrestricted Subsidiaries)) which is on terms that are less favorable than are obtainable from any Person which is not one of its Affiliates. 9.15 Employee Benefit Plans. Maintain, and cause each Subsidiary to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations. 9.16 Environmental Matters. (a) If any Release or Disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of the Company or any Subsidiary, the Borrower and the Company shall, and the Company shall cause the applicable Subsidiary to, cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply with all Environmental Laws. Without limiting the generality of the foregoing, the Borrower and the Company shall, and the Company shall cause each Subsidiary to, comply with any valid Federal or state judicial or administrative order requiring the performance at any real property of the Company or any Subsidiary of activities in response to the Release or threatened Release of a Hazardous Substance. (b) To the extent that the transportation of "hazardous waste" as defined by RCRA is permitted by this Agreement, the Borrower and the Company shall, and the Company shall cause 44 its Subsidiaries to, dispose of such hazardous waste only at licensed disposal facilities operating in substantial compliance with Environmental Laws. 9.17 Unconditional Purchase Obligations. Not, and not permit any Subsidiary to, enter into or be a party to any contract for the purchase of materials, supplies or other property or services if such contract requires that payment be made by it regardless of whether delivery is ever made of such materials, supplies or other property or services, other than such contracts which in the aggregate require purchases of less than $5,000,000 per year. 9.18 Inconsistent Agreements. Not, and not permit any Subsidiary to, enter into any agreement (other than this Agreement or any other Loan Document) containing any provision which would (a) be violated or breached by any borrowing by the Borrower hereunder or by the performance by the Borrower, the Company or any Subsidiary of any of its obligations hereunder or under any other Loan Document, (b) other than the Ford Restriction, prohibit the Borrower, the Company or any Subsidiary from granting to the Agent, for the benefit of the Lenders, a Lien on any of its Motor Vehicles or any other property in which the Company and its Subsidiaries are required to grant a Lien to the Agent under Section 9.13(b) or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to the Company or any other applicable Subsidiary, or pay any Indebtedness owed to the Company or any other Subsidiary, (ii) make loans or advances to the Company or (iii) transfer any of its assets or properties to the Company (other than any such encumbrance or restriction contained in one or more agreements relating to the sale of a Subsidiary pending such sale, provided that such encumbrance or restriction applies only to such Subsidiary and such sale is permitted hereunder). 9.19 Business Activities. Not, and not permit any Subsidiary to, engage in any line of business other than the businesses engaged in on the Initial Closing Date and businesses reasonably related thereto. 9.20 Investments. Not, and not permit any Subsidiary to, make or permit to exist any Investment in any other Person, except (without duplication) the following: (a) contributions by the Company to the capital of any of its Subsidiaries, or by any such Subsidiary to the capital of any of its Subsidiaries; (b) Investments by the Company in any Subsidiary or by any Subsidiary in the Company, by way of intercompany loans, advances or guaranties, all to the extent permitted by Section 9.7, provided that neither the Company nor any Subsidiary may Guarantee, or otherwise provide any credit support of any kind (including any undertaking, Guarantee, indemnity, agreement or instrument that would constitute Indebtedness) with respect to any Indebtedness of an Unrestricted Subsidiary or otherwise have any direct or indirect liability with respect to any such Indebtedness, in each case other than under Customary Recourse Arrangements; (c) Guarantees permitted by Section 9.7; (d) Cash Equivalent Investments; 45 (e) bank deposits in the ordinary course of business; (f) Investments in securities of account debtors received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such account debtors; (g) Investments existing on the Initial Closing Date and listed on Schedule 9.20; (h) accounts receivable (including Motor Vehicle Receivables) arising and trade credit granted in the ordinary course of business and any securities received in satisfaction or partial satisfaction thereof in connection with accounts of financially troubled Persons to the extent reasonably necessary to prevent or limit loss; (i) residual or subordinate interests retained by the Company or any Subsidiary in connection with a Securitization of Motor Vehicle Receivables owing (immediately prior to such Securitization) to the Company or any Subsidiary (other than an Unrestricted Subsidiary or an Excluded Subsidiary); (j) Investments to consummate Acquisitions permitted by Section 9.10; (k) (x) bona fide Hedging Agreements entered into by the Company or any Subsidiary (other than an Unrestricted Subsidiary) with an Unrestricted Subsidiary to protect against fluctuations in interest rates (and not entered into for speculative purposes) in respect of Indebtedness of such Unrestricted Subsidiary so long as the notional amount of Indebtedness hedged thereby does not exceed the amount of Indebtedness of such Unrestricted Subsidiary reasonably expected to be outstanding and (y) other Hedging Agreements (not entered into with any Unrestricted Subsidiary) entered into for bona fide hedging purposes and not for speculation; (l) Investments, in addition to the Investments listed above, in an aggregate amount not exceeding $25,000,000; provided that (x) any Investment which when made complies with the requirements of the definition of the term "Cash Equivalent Investment" may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; and (y) no Investment otherwise permitted by clause (b), (c), (j), (k) or (l) shall be permitted to be made if, immediately before or after giving effect thereto, any Event of Default or Unmatured Event of Default exists. 9.21 Restriction of Amendments to Certain Documents. Not amend or otherwise modify, or waive any rights under, any document evidencing Subordinated Debt, if, in any case, such amendment, modification or waiver could reasonably be expected to be adverse to the interests of the Lenders. 9.22 Fiscal Year. Not change its Fiscal Year; provided that (a) the Company shall be permitted to change its Fiscal Year one time if the Company gives the Agent at least 60 days' prior notice thereof and (b) after the giving of such notice the Company and the Lenders shall 46 negotiate in good faith to make arrangements (including, if the Agent determines the same is necessary, entering into an amendment hereto) to take the consequences of such change into account (including as to financial reporting). 9.23 Landlord Agreements. Use its commercially reasonable efforts to deliver to the Agent landlord agreements, in form and substance satisfactory to the Agent, from the landlord of each location of the Company and its Subsidiaries where Motor Vehicles are kept and that is not owned by the Company or the applicable Subsidiary (it being understood that neither the Company nor any Subsidiary (i) has any right to require any landlord to enter into such agreements or (ii) is required to incur any material expense or liability in its effort to obtain such agreements). 9.24 Excess Collections. Cause to be paid to the Company and its Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries) at least once during each calendar quarter, any and all excess collections held by any Unrestricted Subsidiary in connection with a Securitization (it being understood that excess collections shall mean collections that are not required to be paid to or held for the benefit of investors, servicers, credit support providers, trustees or other parties to such Securitization or required to be retained by such Unrestricted Subsidiary to satisfy minimum capitalization requirements). SECTION 10. EFFECTIVENESS; CONDITIONS OF LENDING, ETC. The obligation of each Lender to enter into this Agreement and to make its Loans (and the obligation of the Fronting Lender to enter into Drafting Agreements or any other Drafting arrangements (whether in writing or oral)) is subject to the following conditions precedent: 10.1 Amendment Effective Date. The effectiveness of this Agreement is subject to the conditions precedent that the Agent shall have received all of the following, each duly executed and dated the Amendment Effective Date (or such earlier date as shall be satisfactory to the Agent), in form and substance satisfactory to the Agent (and the date on which all such conditions precedent have been satisfied or waived in writing by the Agent and the Required Lenders is called the "Amendment Effective Date"): 10.1.1 Resolutions. Certified copies of resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance by the Borrower of this Agreement and the other Loan Documents to which the Borrower is a party; and certified copies of resolutions of the Board of Directors (or other governing body) of each other Loan Party (other than CarMax Properties) authorizing the execution, delivery and performance by such Loan Party of each Loan Document to which such entity is a party. 10.1.2 Consents, etc. Certified copies of all documents evidencing any necessary corporate, limited liability company or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Borrower, the Company and each other Loan Party of the documents referred to in this Section 10. 10.1.3 Incumbency and Signature Certificates. A certificate of the Secretary or an Assistant Secretary (or other appropriate representative) of each Loan Party (other than CarMax Properties) certifying the names of the officer or officers of such entity authorized to sign the 47 Loan Documents to which such entity is a party, together with a sample of the true signature of each such officer (it being understood that the Agent and each Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein). 10.1.4 Guaranty. A counterpart of the Guaranty dated as of the Amendment Effective Date executed by CarMax Properties. 10.1.5 Confirmation of Guaranty. A confirmation of the Guaranty, substantially in the form set forth in Exhibit K, executed by each of the Company's Subsidiaries (other than the Borrower, CarMax Properties and the Unrestricted Subsidiaries). 10.1.6 Security Agreement. A counterpart of the Security Agreement executed by the Borrower, the Company and each of its Subsidiaries (other than Unrestricted Subsidiaries and Excluded Subsidiaries). 10.1.7 Control Agreement. A counterpart of the Control Agreement executed by Wachovia Bank, National Association, the Borrower and the Agent. 10.1.8 Opinion of Counsel. The opinion of McGuireWoods LLP, substantially in the form of Exhibit H. 10.1.9 Payment of Fees. Evidence of payment by the Borrower of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Amendment Effective Date, together with all Attorney Costs of the Agent to the extent invoiced prior to the Amendment Effective Date, plus such additional amounts of Attorney Costs as shall constitute the Agent's reasonable estimate of Attorney Costs incurred or to be incurred by the Agent through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Agent). 10.1.10 Solvency Certificate. A Solvency Certificate, substantially in the form of Exhibit F, executed by the Chief Financial Officer of each Loan Party (other than CarMax Properties). 10.1.11 Filings, Registrations and Recordings. The Agent shall have received: (i) each document (including Uniform Commercial Code financing statements) required by the Collateral Documents or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create in favor of the Agent, for the benefit of the Lenders, a perfected Lien on the collateral described therein, prior and superior to the Lien of any other Person, in proper form for filing, registration or recording; and (ii) a certificate from the Borrower to the effect that the name of each Loan Party as shown on the public records of such Loan Party's jurisdiction of organization has not changed from the name of such Loan Party as contained in the organizational documents delivered to the Agent on the Initial Closing Date. 10.1.12 Closing Certificate. A certificate signed by a Vice President of the Company dated as of the Amendment Effective Date, affirming the matters set forth in Section 10.2.1 as of the Amendment Effective Date. 48 10.1.13 Other. Such other documents as the Agent or any Lender may reasonably request. 10.2 Conditions. The obligation of each Lender to make each Loan and of the Fronting Lender to enter into Drafting Agreements or any other Drafting arrangements (whether in writing or oral) is subject to the following further conditions precedent that: 10.2.1 Compliance with Warranties, No Default, etc. Both before and after giving effect to the making of any Loan (other than Revolving Loans made to refund the Borrower's reimbursement obligation with respect to any Draft, Revolving Loans to refund Swing Line Loans and Revolving Loans to refund Fronting Lender Advances that have ceased to be the same), the issuance of any Drafting Agreement or any other Drafting arrangement, the following statements shall be true and correct: (a) the representations and warranties of the Borrower, the Company and each other Loan Party set forth in this Agreement and the other Loan Documents shall be true and correct in all material respects with the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and (b) no Event of Default or Unmatured Event of Default shall have then occurred and be continuing. 10.2.2 Confirmatory Certificate. If requested by the Agent or any Lender, the Agent shall have received (in sufficient counterparts to provide one to each Lender) a certificate dated the date of such requested Loan, Drafting Agreement or other Drafting arrangement and signed by a duly authorized representative of the Borrower as to the matters set out in Section 10.2.1 (it being understood that each request by the Borrower for the making of a Loan (and each deemed request therefor) or for the Fronting Lender to enter into any Drafting Agreement or other Drafting arrangement shall be deemed to constitute a warranty by the Borrower that the conditions precedent set forth in Section 10.2.1 will be satisfied at the time of the making of such Loan or of the entering into such Drafting Agreement or other Drafting arrangement), together with such other documents as the Agent or any Lender may reasonably request in support thereof. SECTION 11. EVENTS OF DEFAULT AND THEIR EFFECT. 11.1 Events of Default. Each of the following shall constitute an Event of Default under this Agreement: 11.1.1 Non-Payment of the Loans, etc. Default in the payment when due of the principal of any Loan; or default, and continuance thereof for ten days, in the payment when due of any interest, fee, reimbursement obligation or other amount payable by the Borrower hereunder or under any other Loan Document. 11.1.2 Non-Payment of Other Indebtedness. Any default shall occur under the terms applicable to any Indebtedness of the Company or any Subsidiary in an aggregate amount (for all such Indebtedness so affected) exceeding $5,000,000 and such default shall (a) consist of the 49 failure to pay such Indebtedness when due, whether by acceleration or otherwise and after giving effect to any applicable grace period, or (b) accelerate the maturity of such Indebtedness or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Indebtedness to become due and payable prior to its expressed maturity; or any such Indebtedness shall be required to be prepaid or redeemed (other than by a regularly scheduled prepayment or redemption), purchased or defeased or an offer to prepay, redeem, purchase or defease such Indebtedness shall be required to be made, in each case prior to the stated maturity thereof. 11.1.3 Other Material Obligations. Default in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, the Company or any Subsidiary with respect to any material purchase or lease of goods or services, or any agreement with a Manufacturer, where such default, singly or in the aggregate with all other such defaults, might reasonably be expected to have a Material Adverse Effect; or default in the performance or observance by the Company or any Subsidiary of any of its obligations under any Dealer Franchise Agreement where such default might reasonably be expected to have a Material Adverse Effect. 11.1.4 Bankruptcy, Insolvency, etc. The Company or any Subsidiary (other than an Unrestricted Subsidiary) becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or the Company or any Subsidiary (other than an Unrestricted Subsidiary) applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for the Company or such Subsidiary or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for the Company or such Subsidiary or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is commenced in respect of the Company or any Subsidiary (other than an Unrestricted Subsidiary), and if such case or proceeding is not commenced by the Company or such Subsidiary, it is consented to or acquiesced in by the Company or such Subsidiary, or remains for 60 days undismissed; or the Company or any Subsidiary (other than an Unrestricted Subsidiary) takes any action to authorize, or in furtherance of, any of the foregoing. 11.1.5 Non-Compliance with Loan Documents. (a) Failure by the Borrower or the Company to comply with or to perform any covenant set forth in Section 9.1.5(a), 9.5 through 9.14, 9.19 through 9.21 or 9.24 or (b) failure by the Borrower, the Company or any other Loan Party to comply with or to perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 11) and continuance of such failure for 30 days. 11.1.6 Warranties. Any warranty made by the Company or any Subsidiary herein or in any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by the Company or any Subsidiary to the Agent or any Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified. 50 11.1.7 Pension Plans. (i) Institution of any steps by the Company or any other Person to terminate a Pension Plan if as a result of such termination the Company could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan, in excess of $5,000,000; (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; or (iii) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan and the withdrawal liability (without unaccrued interest) to Multiemployer Pension Plans as a result of such withdrawal (including any outstanding withdrawal liability that the Company and the Controlled Group have incurred on the date of such withdrawal) exceeds $5,000,000. 11.1.8 Judgments. Final judgments which exceed an aggregate of $5,000,000 shall be rendered against the Company or any Subsidiary and shall not have been paid, discharged or vacated or had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments. 11.1.9 Invalidity of Guaranty, etc. The Guaranty shall cease to be in full force and effect with respect to any Subsidiary party thereto, other than by virtue of the release of such Subsidiary after sale thereof in a transaction permitted hereunder; or any Subsidiary (or any Person by, through or on behalf of such Subsidiary) shall contest in any manner the validity, binding nature or enforceability of the Guaranty with respect to such Subsidiary; or the provisions of Section 14 shall cease to be in full force and effect with respect to the Company; or the Company (or any Person by, through or on behalf of the Company) shall contest in any manner the validity, binding nature or enforceability of the provisions of Section 14. 11.1.10 Invalidity of Collateral Documents, etc. Any Collateral Document shall cease to be in full force and effect; or the Company or any Subsidiary (or any Person by, through or on behalf of the Company or any Subsidiary) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document. 11.1.11 Change in Control. Any Change in Control shall occur. 11.2 Effect of Event of Default. If any Event of Default described in Section 11.1.4 shall occur, the Commitments (if they have not theretofore terminated) shall immediately terminate and the Loans and all other obligations hereunder shall become immediately due and payable and the Borrower shall become immediately obligated to Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House, all without presentment, demand, protest or notice of any kind, and the Fronting Lender shall terminate all Drafting Agreements and all other Drafting arrangements (whether in writing or oral); and, if any other Event of Default shall occur and be continuing, (i) the Agent (upon written request of the Required Lenders) shall declare the Commitments (if they have not theretofore terminated) to be terminated and/or declare all Loans and all other obligations hereunder to be due and payable and/or demand that the Borrower immediately Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House, whereupon the Commitments (if they have not theretofore terminated) shall immediately terminate and/or all Loans and all other 51 obligations hereunder shall become immediately due and payable and/or the Borrower shall immediately become obligated to Cash Collateralize in full all amounts estimated by the Fronting Lender as being potentially payable under all Drafting Agreements and all other Drafting arrangements (whether in writing or oral) then existing with any Manufacturer or Auction House, all without presentment, demand, protest or notice of any kind and (ii) the Fronting Lender in its sole discretion may, and at the request of the Required Lenders shall (and, to the extent the Commitments have been terminated, such request shall be deemed to have been made), terminate all Drafting Agreements and all other Drafting arrangements (whether in writing or oral). The Agent shall promptly advise the Borrower of any such declaration, but failure to do so shall not impair the effect of such declaration. Notwithstanding the foregoing, the effect as an Event of Default of any event described in Section 11.1.1 or Section 11.1.4 may be waived by the written concurrence of all of the Lenders, and the effect as an Event of Default of any other event described in this Section 11 may be waived by the written concurrence of the Required Lenders (except as provided in Section 13.1). Any cash collateral delivered hereunder shall be held by the Agent (without liability for interest thereon) and applied to obligations arising in connection with any funding of any Draft. After the expiration or termination of all Drafting Agreements and all other Drafting arrangements (whether in writing or oral), such cash collateral shall be applied by the Agent to any remaining obligations hereunder and any excess shall be delivered to the Borrower or as a court of competent jurisdiction may direct. SECTION 12. THE AGENT. 12.1 Appointment and Authorization. Each Lender hereby irrevocably (subject to Section 12.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duty or responsibility except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 12.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 12.3 Liability of Agent. None of the Agent nor any of its directors, officers, employees or agents shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this 52 Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Borrower, the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 12.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Borrower or the Company), independent accountants and other experts reasonably selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate and, if it so requests, confirmation from the Lenders of their obligation to indemnify the Agent against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 12.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender, the Borrower or the Company referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a "notice of default". The Agent will notify the Lenders of its receipt of any such notice. The Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required Lenders in accordance with Section 11; provided that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Lenders. 12.6 Credit Decision. Each Lender acknowledges that the Agent has not made any representation or warranty to it, and that no act by the Agent hereafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and made its own decision to enter into this Agreement and to 53 extend credit to the Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon the Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Agent, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial or other condition or creditworthiness of the Borrower, the Company or any other Loan Party which may come into the possession of the Agent. 12.7 Indemnification. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent and its directors, officers, employees and agents (to the extent not reimbursed by or on behalf of the Company and the Borrower and without limiting the obligation of the Company and the Borrower to do so), pro rata, from and against any and all Indemnified Liabilities; provided that no Lender shall be liable for any payment to any such Person of any portion of the Indemnified Liabilities resulting from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company and the Borrower. The undertaking in this Section shall survive repayment of the Loans, termination of the Commitments, cancellation of the Notes, expiration or termination of the Drafting Agreements, any foreclosure under, or modification, release or discharge of, any or all of the Collateral Documents, termination of this Agreement and the resignation or replacement of the Agent. 12.8 Agent in Individual Capacity. DCSNA and its Affiliates may make loans to, issue letters of credit for the account of, acquire equity interests in and generally engage in any kind of business with the Company and its Subsidiaries and Affiliates as though DCSNA were not the Agent or the Fronting Lender hereunder and without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, DCSNA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Affiliate) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to their Loans (if any), DCSNA and its Affiliates shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though DCSNA were not the Agent or the Fronting Lender, and the terms "Lender" and "Lenders" include DCSNA and its Affiliates, to the extent applicable, in their individual capacities. 12.9 Successor Agent. The Agent may resign as Agent upon 120 days' notice to the Lenders and the Borrower. If the Agent resigns under this Agreement, the Required Lenders shall, with (so long as no Event of Default exists) the consent of the Borrower (which shall not 54 be unreasonably withheld or delayed), appoint from among the Lenders a successor agent for the Lenders. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Lenders and the Borrower, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent, and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 12 and Sections 13.6 and 13.13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. 12.10 Collateral Matters. The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent under any Collateral Document (i) upon termination of the Commitments and payment in full of all Loans and all other obligations of the Borrower hereunder and the expiration or termination of all Drafting Agreements and all other Drafting arrangements (whether in writing or oral); (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; or (iii) subject to Section 13.1, if approved, authorized or ratified in writing by the Required Lenders. Upon request by the Agent at any time, the Lenders will confirm in writing the Agent's authority to release particular types or items of collateral pursuant to this Section 12.10. 12.11 Funding Reliance. (a) Unless the Agent receives notice from a Lender by noon, Detroit time, on the day of a proposed borrowing that such Lender will not make available to the Agent an amount equal to its pro rata share of such borrowing, the Agent may assume that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make a corresponding amount available to the Borrower. If and to the extent such Lender has not made such amount available to the Agent, such Lender and the Borrower jointly and severally agree to repay such amount to the Agent forthwith on demand, together with interest thereon at the interest rate applicable to Loans comprising such borrowing or, in the case of any Lender which repays such amount within three Business Days, the Federal Funds Rate. Nothing set forth in this clause (a) shall relieve any Lender of any obligation it may have to make any Loan hereunder. (b) Unless the Agent receives notice from the Borrower prior to the due date for any payment hereunder that the Borrower does not intend to make such payment, the Agent may assume that the Borrower has made such payment and, in reliance upon such assumption, make available to each Lender its share of such payment. If and to the extent that the Borrower has not made any such payment to the Agent, each Lender which received a share of such payment shall repay such share (or the relevant portion thereof) to the Agent forthwith on demand, together with interest thereon at the Interest Rate (or, in the case of any Lender which repays such amount within three Business Days, the 55 Federal Funds Rate). Nothing set forth in this clause (b) shall relieve the Borrower of any obligation it may have to make any payment hereunder. SECTION 13. GENERAL. 13.1 Waiver; Amendments. No delay on the part of the Agent or any Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the Notes shall in any event be effective unless the same shall be in writing and signed and delivered by Lenders having an aggregate Total Percentage of not less than the aggregate Total Percentage expressly designated herein with respect thereto or, in the absence of such designation as to any provision of this Agreement or the Notes, by the Required Lenders, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, the Lenders authorize the Agent to act within its discretion (and without notice to or the consent of any Lender) to waive or forbear on behalf of all Lenders any noncompliance by the Borrower or the Company (other than a waiver of, or forbearance with respect to, any Event of Default under Section 11.1.4 and other than a waiver of any Event of Default under Section 11.1.1) with this Agreement (provided that no such waiver shall be for a period in excess of 90 days). No amendment, modification, waiver or consent shall change the Total Percentage of any Lender without the consent of such Lender. No amendment, modification, waiver or consent shall (i) increase the Revolving Commitment Amount, (ii) extend the date for payment of any principal of or interest on the Loans or any fees payable hereunder, (iii) reduce the principal amount of any Loan, the rate of interest thereon or any fees payable hereunder, (iv) release the Guaranty, release the Company from the provisions of Section 14 or release all or any substantial part of the collateral granted under the Collateral Documents or (v) reduce the aggregate Total Percentage required to effect an amendment, modification, waiver or consent without, in each case, the consent of all Lenders. No provision of Section 12 or other provision of this Agreement affecting the Agent in its capacity as such shall be amended, modified or waived without the consent of the Agent. No provision of this Agreement relating to the rights or duties of the Fronting Lender in its capacity as such shall be amended, modified or waived without the consent of the Fronting Lender. 13.2 Confirmations. The Borrower and each holder of a Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing (with a copy of each such confirmation to the Agent) the aggregate unpaid principal amount of the Loans then outstanding under such Note. 13.3 Notices. Except as otherwise provided in Section 2.2, all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on Schedule 13.3 or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. For purposes of Section 2.2, the Agent shall 56 be entitled to rely on telephonic instructions from any person that the Agent in good faith believes is an authorized officer or employee of the Borrower, and the Borrower shall hold the Agent and each other Lender harmless from any loss, cost or expense resulting from any such reliance. 13.4 Computations. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided that if the Company notifies the Agent that the Company wishes to amend any covenant in Section 9 to eliminate or to take into account the effect of any change in GAAP or any change in the Company's application of GAAP on the operation of such covenant (or if the Agent notifies the Company that the Required Lenders wish to amend Section 9 for such purpose), then the Company's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP or the relevant change in the Company's application of GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Lenders. The Company may notify the Agent of any one-time adjustments to its financial statements and after the giving of such notice the Company and the Lenders shall negotiate in good faith to make arrangements (including, if the Agent determines the same is necessary, entering into an amendment hereto) to take the consequences of such adjustment into account. 13.5 Regulation U. Each Lender represents that it in good faith is not relying, either directly or indirectly, upon any Margin Stock as collateral security for the extension or maintenance by it of any credit provided for in this Agreement. 13.6 Costs, Expenses and Taxes. The Company and the Borrower jointly and severally agree to pay on demand all reasonable out-of-pocket costs and expenses of the Agent (including Attorney Costs) in connection with the preparation, execution, syndication, delivery and administration of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), and all out-of-pocket costs and expenses (including Attorney Costs) incurred by the Agent and each Lender after an Event of Default in connection with the enforcement of this Agreement, the other Loan Documents or any such other documents. In addition, the Company and the Borrower jointly and severally agree to pay, and to save the Agent and the Lenders harmless from all liability for, (a) any stamp or other taxes (excluding income taxes and franchise taxes based on net income) which may be payable in connection with the execution and delivery of this Agreement, the borrowings hereunder, the issuance of the Notes or the execution and delivery of any other Loan Document or any other document provided for herein or delivered or to be delivered hereunder or in connection herewith and (b) any fees of the Company's auditors in connection with any exercise by the Agent and the Lenders of their rights pursuant to Section 9.2. All obligations provided for in this Section 13.6 shall survive repayment of the Loans, termination of the Commitments, cancellation of the Notes, expiration of the Drafting Agreements and termination of this Agreement. 57 13.7 Subsidiary References. The provisions of this Agreement relating to Subsidiaries shall apply only during such times as the Company has one or more Subsidiaries. 13.8 Captions. Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement. 13.9 Assignments; Participations. 13.9.1 Assignments. Any Lender may, with the prior written consent of the Agent and (so long as no Event of Default exists) the Borrower (which consents shall not be unreasonably delayed or withheld and, in any event, shall not be required for an assignment by a Lender to one of its Affiliates or to any other Lender), at any time assign and delegate to one or more commercial banks or other Persons (any Person to whom such an assignment and delegation is to be made being herein called an "Assignee") all or any fraction of such Lender's Loans and Commitment (which assignment and delegation shall be of a constant, and not a varying, percentage of all the assigning Lender's Loans and Commitment) in a minimum aggregate amount equal to the lesser of (i) the amount of the assigning Lender's Revolving Percentage of the Revolving Commitment Amount plus such Lender's Term Loans and (ii) $50,000,000; provided that (a) no assignment and delegation may be made to any Person if, at the time of such assignment and delegation, the Borrower would be obligated to pay any greater amount under Section 7.6 to the Assignee than the Borrower is then obligated to pay to the assigning Lender under such Section (and if any assignment is made in violation of the foregoing, the Borrower will not be required to pay the incremental amounts) and (b) the Borrower and the Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee until the date when all of the following conditions shall have been met: (x) five Business Days (or such lesser period of time as the Agent and the assigning Lender shall agree) shall have passed after written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee, shall have been given to the Borrower and the Agent by such assigning Lender and the Assignee, (y) the assigning Lender and the Assignee shall have executed and delivered to the Borrower and the Agent an assignment agreement substantially in the form of Exhibit G (an "Assignment Agreement"), together with any documents required to be delivered thereunder, which Assignment Agreement shall have been accepted by the Agent, and (z) except in the case of an assignment by a Lender to one of its Affiliates, the assigning Lender or the Assignee shall have paid the Agent a processing fee of $3,500. From and after the date on which the conditions described above have been met, (x) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (y) the assigning Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it pursuant to such Assignment Agreement, shall be released from its obligations 58 hereunder. Within five Business Days after effectiveness of any assignment and delegation, the Borrower shall execute and deliver to the Agent (for delivery to the Assignee) a new Note (unless the Assignee was already a holder of a Note immediately prior to such effectiveness). Each such Note shall be dated the effective date of such assignment. Accrued interest on that part of the predecessor Note being assigned shall be paid as provided in the Assignment Agreement. Accrued interest and fees on that part of the predecessor Note not being assigned shall be paid to the assigning Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Note and in this Agreement. Any attempted assignment and delegation not made in accordance with this Section 13.9.1 shall be null and void. Notwithstanding the foregoing provisions of this Section 13.9.1 or any other provision of this Agreement, any Lender may at any time assign all or any portion of its Loans and its Note to a Federal Reserve Bank (but no such assignment shall release any Lender from any of its obligations hereunder). 13.9.2 Participations. Any Lender may at any time sell to one or more commercial banks or other Persons participating interests in any Loan owing to such Lender, the Note held by such Lender, the Commitment of such Lender or any other interest of such Lender hereunder (any Person purchasing any such participating interest being herein called a "Participant"). In the event of a sale by a Lender of a participating interest to a Participant, (x) such Lender shall remain the holder of its Note for all purposes of this Agreement, (y) the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations hereunder and (z) all amounts payable by the Borrower shall be determined as if such Lender had not sold such participation and shall be paid directly to such Lender. No Participant shall have any direct or indirect voting rights hereunder except with respect to any of the events described in the fourth sentence of Section 13.1. Each Lender agrees to incorporate the requirements of the preceding sentence into each participation agreement which such Lender enters into with any Participant. The Borrower agrees that if amounts outstanding under this Agreement and the Notes are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement or such Note; provided that such right of setoff shall be subject to the obligation of each Participant to share with the Lenders, and the Lenders agree to share with each Participant, as provided in Section 7.5. The Borrower also agrees that each Participant shall be entitled to the benefits of Section 7.6 as if it were a Lender (provided that no Participant shall receive any greater compensation pursuant to Section 7.6 than would have been paid to the participating Lender if no participation had been sold). 13.10 Governing Law. This Agreement and each Note shall be a contract made under and governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. All obligations 59 of the Borrower and the Company and rights of the Agent and the Lenders expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. 13.11 Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. 13.12 Successors and Assigns. This Agreement shall be binding upon the Borrower, the Company, the Lenders and the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Company, the Lenders and the Agent and the successors and assigns of the Lenders and the Agent. 13.13 Indemnification by the Company and the Borrower. In consideration of the execution and delivery of this Agreement by the Agent and the Lenders and the agreement to extend the Commitments provided hereunder, the Company and the Borrower hereby jointly and severally agree to indemnify, exonerate and hold the Agent, each Lender and each of the officers, directors, employees, Affiliates and agents of the Agent and each Lender (each a "Lender Party") free and harmless from and against any and all actions, causes of action, suits, losses, liabilities, damages and expenses, including Attorney Costs (collectively, the "Indemnified Liabilities"), incurred by the Lender Parties or any of them as a result of, or arising out of, or relating to (i) any tender offer, merger, purchase of stock, purchase of assets or other similar transaction financed or proposed to be financed in whole or in part, directly or indirectly, with the proceeds of any of the Loans, (ii) the use, handling, release, emission, discharge, transportation, storage, treatment or disposal of any hazardous substance at any property owned or leased by the Company or any Subsidiary, (iii) any violation of any Environmental Law with respect to conditions at any property owned or leased by the Company or any Subsidiary or the operations conducted thereon, (iv) the investigation, cleanup or remediation of offsite locations at which the Company or any Subsidiary or their respective predecessors are alleged to have directly or indirectly disposed of hazardous substances (it being understood that such indemnity shall not apply to the extent any such liabilities are finally determined by a court to have been caused by a Lender Party's involvement at such offsite location) or (v) the execution, delivery, performance or enforcement of this Agreement or any other Loan Document by any of the Lender Parties, except for any such Indemnified Liabilities arising on account of the applicable Lender Party's gross negligence or willful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Company and the Borrower hereby jointly and severally agree to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. All obligations provided for in this Section 13.13 shall survive repayment of the Loans, termination of the Commitments, cancellation of the Notes, expiration of the Drafting Agreements, any foreclosure under, or any modification, release or discharge of, any or all of the Collateral Documents and termination of this Agreement. 13.14 Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders and the Agent on the other hand shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibility to the Borrower or the 60 Company. Neither the Agent nor any Lender undertakes any responsibility to the Company or the Borrower to review or inform the Company or the Borrower of any matter in connection with any phase of the Company's or the Borrower's business or operations. Each of the Borrower and the Company agrees that neither the Agent nor any Lender shall have liability to the Borrower or the Company (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower or the Company in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither the Agent nor any Lender shall have any liability with respect to, and each of the Borrower and the Company hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Borrower or the Company in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. 13.15 Consent to Jurisdiction. EACH OF THE BORROWER AND THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MICHIGAN AND OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN FOR THE PURPOSE OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. EACH OF THE BORROWER AND THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF MICHIGAN. EACH OF THE BORROWER AND THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 13.16 Waiver of Jury Trial. EACH OF THE BORROWER, THE COMPANY, THE AGENT AND EACH LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 13.17 Confidentiality. Each Lender agrees to take, and to cause its Affiliates to take, normal and reasonable precautions and exercise due care to maintain the confidentiality of all non-public information provided to it by the Company or any Subsidiary or by Circuit City, or by the Agent on the Company's or any Subsidiary's or Circuit City's behalf, under this 61 Agreement or any other Loan Document, and neither such Lender nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary or Circuit City, except to the extent such information was or becomes generally available to the public other than as a result of disclosure by such Lender or was or becomes available on a non-confidential basis from a source other than the Company, a Subsidiary or Circuit City (provided that such source is not bound by a confidentiality agreement with the Company or any Subsidiary known to such Lender); provided, however, that any Lender may disclose such information (A) at the request or pursuant to any requirement of any governmental authority to which such Lender is subject or in connection with an examination of such Lender by any such authority, (B) pursuant to subpoena or other court process, when required to do so in accordance with the provisions of any applicable requirement of law, (C) to the extent reasonably required in connection with any litigation or proceeding to which the Agent or any Lender or any of their respective Affiliates may be party, (D) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document, (E) to such Lender's independent auditors and other professional advisors, (F) to any participant or assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder, (G) as to any Lender or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company, any Subsidiary or Circuit City is party or is deemed party with such Lender or such Affiliate, (H) to its Affiliates and (I) to any nationally recognized rating agency that requires access to information about such Lender's investment portfolio in connection with ratings issued to such Lender. SECTION 14. GUARANTY. 14.1 The Guaranty. The Company hereby unconditionally and irrevocably guarantees (as primary obligor and not merely as surety) to the Lenders and the Agent, and to each of them, the due and punctual payment, observance and performance of all of the Guaranteed Obligations when and as due, whether at maturity, by acceleration, mandatory prepayment or otherwise, according to the terms hereof and thereof, and the Company hereby unconditionally and irrevocably agrees to cause payment or performance of the Guaranteed Obligations to be made punctually as and when the same shall become due upon demand. This guaranty shall be of payment and performance and not of collection merely. 14.2 Guaranty Unconditional. The obligations of the Company under this Section 14 shall be continuing, unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any Guaranteed Obligation, by operation of law or otherwise; (b) any modification or amendment of or supplement to any Loan Document; 62 (c) any modification, amendment, waiver, release, non-perfection or invalidity of any direct or indirect security, or of any Guarantee or other liability of any third party, for any Guaranteed Obligation; (d) any change in the corporate existence, structure or ownership of the Borrower or any other Loan Party, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Borrower or any other Loan Party or its assets or any resulting release or discharge of any Guaranteed Obligation; (e) the existence of any claim, setoff or other right which the Company may have at any time against the Borrower, the Agent, any Lender or any other Person, whether or not arising in connection with the Loan Documents; (f) any invalidity or unenforceability relating to or against the Borrower or any other Loan Party for any reason of the whole or any provision of any Loan Document, or any provision of applicable law purporting to prohibit the payment or performance by the Borrower of the Guaranteed Obligations; or (g) any other act or omission of any kind to act or delay by the Borrower, any other Loan Party, the Agent, any Lender or any other Person or any other circumstance whatsoever that might, but for the provisions of this Section 14.2, constitute a legal or equitable discharge of the obligations of the Company under this Section 14. 14.3 Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances. The Company's obligations under this Section 14 shall remain in full force and effect until all of the Commitments shall have expired or been terminated and all of the Guaranteed Obligations shall have been paid in full in cash. If at any time all or any part of any payment previously applied to any Guaranteed Obligation is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, the obligations of the Company under this Section 14 with respect to such payment shall be reinstated at such time as though such payment had not been made at such time. 14.4 Waiver. The Company irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Borrower or any other Person or any collateral. The Company hereby expressly waives (a) notice of the acceptance by the Agent or any Lender of this Section 14 and (b) notice of the existence or creation or nonpayment of all or any of the Guaranteed Obligations. 14.5 Stay of Acceleration. If acceleration of the time for payment of any amount payable by the Borrower under any Loan Document is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of the Loan Documents shall nonetheless be payable by the Company hereunder forthwith on demand by the Agent. 14.6 Delay of Subrogation. Notwithstanding any payment made by or for the account of the Company pursuant to this Section 14, the Company shall not be subrogated to any right of 63 the Agent or any Lender until such time as the Agent and each Lender shall have received final payment in cash of the full amount of the Guaranteed Obligations. 64 Delivered at Detroit, Michigan as of the day and year first above written. CARMAX AUTO SUPERSTORES, INC. By /s/ Keith D. Browning ----------------------------------- Title Executive VP and CFO ---------------------------- CARMAX, INC. By /s/ Keith D. Browning ----------------------------------- Title Executive VP and CFO ---------------------------- DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as Agent and as a Lender By /s/ R. D. Knight ----------------------------------- Title V.P. Credit ---------------------------- TOYOTA MOTOR CREDIT CORPORATION, as a Lender By /s/ P. Reid Boozer ----------------------------------- Title National Accounts Mgr. ---------------------------- 65 EXHIBIT A FORM OF NOTE ____________, 200_ Detroit, Michigan The undersigned, for value received, promises to pay to the order of ____________________ (the "Lender") at the principal office of DaimlerChrysler Services North America LLC (the "Agent") in Southfield, Michigan the aggregate unpaid amount of all Loans made to the undersigned by the Lender pursuant to the Credit Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of the Lender), such principal amount to be payable on the dates set forth in the Credit Agreement. The undersigned further promises to pay interest on the unpaid principal amount of each Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America. This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Amended and Restated Credit Agreement, dated as of February 10, 2003 (as amended or otherwise modified from time to time, the "Credit Agreement"; capitalized terms not otherwise defined herein are used herein as defined in the Credit Agreement), among the undersigned, CarMax, Inc., certain financial institutions (including the Lender) and the Agent, to which Credit Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. This Note is made under and governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State. CARMAX AUTO SUPERSTORES, INC. By:___________________________________ Title:___________________________ A-1 Schedule attached to Note dated __________________, 200_ of CARMAX AUTO SUPERSTORES, INC. payable to the order of ________________________ Unpaid Date and Amount of Date and Amount of Maturity Principal Notation Loan Repayment Date Balance Made by - ------------------ ------------------ -------- --------- -------- A-2 EXHIBIT B FORM OF COMPLIANCE CERTIFICATE I, _______________, the duly elected, qualified and acting [Chief Financial Officer/Treasurer] of CarMax, Inc., a Virginia corporation (the "Company"), DO HEREBY CERTIFY, pursuant to Section 9.1.3 of the Amended and Restated Credit Agreement dated as of February 10, 2003 (as amend, supplemented or otherwise modified from time to time, the "Credit Agreement"; capitalized terms used herein without definition have the meanings assigned thereto in, and Section references are to, the Credit Agreement ) among CarMax Auto Superstores, Inc., the Company, the financial institutions named therein and DaimlerChrysler Services North America LLC, as Agent for the Lenders, as follows: Enclosed herewith is a copy of the [annual audited/quarterly] report of the Company as at [_____________], 200[__] (the "Computation Date"), which report fairly presents in all material respects the financial condition and results of operations [(subject to the absence of footnotes and to normal year-end adjustments)] of the Company as of the Computation Date and has been prepared in accordance with GAAP consistently applied. A review of the activities of the Company during the Fiscal Quarter ended has been made under my supervision, and the Company has observed, performed and fulfilled each and every obligation and covenant contained in the Credit Agreement and no Event of Default or Unmatured Event of Default exists. Set forth below are computations in reasonable detail, as of the end of ________, of compliance with Section 9.6 of the Credit Agreement: I. Current Ratio (Section 9.6.1) A. Consolidated Current Assets: B. Consolidated Current Liabilities: C. Permitted Ratio of A to B: Not less than 1.5:1.0. RATIO: II. Ratio of Total Liabilities to Consolidated Tangible Net Worth (Section 9.6.2) A. Total Liabilities: B. Consolidated Tangible Net Worth: 1. Stockholder's equity: 2. MINUS Asset write-up: 3. MINUS Treasury stock: B-1 4. MINUS Intangibles: 5. MINUS Net capital contributions to and Investments in Unrestricted Subsidiaries (to the extent not otherwise eliminated in the consolidation of the balance sheet of the Company and its Subsidiaries): 6. TOTAL: C. Permitted Ratio of A to B: Not greater than 2.0:1.0. RATIO: III. Fixed Charge Coverage Ratio (Section 9.6.3) A. Net Income: Date and Amount of Date and Amount of 1. MINUS Gains from Asset Sales: 2. MINUS EXTRAORDINARY GAINS: 3. MINUS Gains from Discontinued Operations: 4. TOTAL (Consolidated Net Income): B. EBITDAR: 1. Consolidated Net Income (Item III.A.4): 2. PLUS Interest Expense: 3. PLUS Rental Expense: 4. PLUS Income Tax Expense: 5. PLUS Depreciation: 6. PLUS Amortization: 7. TOTAL (EBITDAR): C. Adjusted EBITDAR: 1. EBITDAR (Item III.B.7): 2. MINUS Income Taxes Paid: 3. MINUS Capital Expenditures (other than Financed Capital Expenditures): 4. TOTAL (Adjusted EBITDAR): B-2 D. Interest Expense: E. Rental Expense: F. TOTAL D PLUS E: G. Permitted Ratio of C.4 to F: Not less than 1.25:1.0. RATIO: IV. Financed Capital Expenditures (Section 9.1.3) A. Financed Capital Expenditures this period: B. Aggregate Financed Capital Expenditures from Initial Closing Date: IN WITNESS WHEREOF, I have signed this certificate this ______ day of ______, 200__. CARMAX, INC. By:__________________________________________ Name: Title: [Chief Financial Officer/Treasurer] B-3 EXHIBIT E SUBORDINATION PROVISIONS APPLICABLE TO SUBORDINATED DEBT The indebtedness evidenced by the subordinated debt (the "Subordinated Debt") shall at all times be wholly subordinate and junior in right or payment to any and all Superior Indebtedness (as defined below) in the manner and with the force and effect hereafter set forth: (a) In the event of any liquidation, dissolution or winding up of the Company/1/, or of any execution sale, receivership, insolvency, bankruptcy, reorganization or other similar proceeding relating to the Company or its property, all principal, interest, fees, reimbursement obligations and other amounts owing on all Superior Indebtedness shall first be paid in cash in full before any payment is made upon the indebtedness evidenced by the Subordinated Debt; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities or other evidences of indebtedness, the payment of which is subordinated to the same extent as the indebtedness evidenced hereby to the payment of all Superior Indebtedness which may at the time be outstanding) which shall be made upon or in respect of the Subordinated Debt shall be paid over to the holders of such Superior Indebtedness, pro rata, for application in payment thereof until such Superior Indebtedness shall have been paid or satisfied in cash in full. (b) During the continuance of any default in any agreement pursuant to which any Superior Indebtedness is issued which arises from the failure to pay when due (whether by acceleration or otherwise) any principal of, premium, if any, interest on, fees or other amounts in respect of such Superior Indebtedness (a "Superior Payment Default"), no payment of principal, premium or interest shall be made on the Subordinated Debt. (c) During the continuance of any event of default or unmatured event of default in any agreement pursuant to which any Superior Indebtedness is issued other than a Superior Payment Default (a "Superior Non-Payment Default") as to which the Company has received notice in writing from any holder or holders of Superior Indebtedness, no payment of principal, premium or interest shall be made on the Subordinated Debt for a period (each, a "Payment Blockage Period") commencing on the date of receipt by the Company of such notice and terminating on the earliest to occur of the following dates: (i) the date of acceleration of the Superior Indebtedness, (ii) 180 days after the Company's receipt of such written notice, (iii) the date such Superior Non-Payment Default shall have been cured or waived, or shall have ceased to exist, (iv) the date the Superior Indebtedness shall have been discharged or paid in full in cash or (v) the date such Payment Blockage Period shall have been terminated by written notice to the Company from the holder or holders of Superior Indebtedness initiating such Payment Blockage Period, after which, in the case of clauses (ii), (iii), (iv) and (v), the Company shall resume making payments in respect of the Subordinated Debt, unless clause (a) or (b) above is then applicable. - ---------- /1/ For purposes of this Exhibit, "Company" is the issuer of the Subordinated Debt. E-1 (d) If the Subordinated Debt is declared or becomes due and payable because of the occurrence of any default thereunder or under the agreement or instrument under which it is issued or otherwise than at the option of the Company, under circumstances when clause (a) above shall not be applicable, the holders of the Subordinated Debt shall not be entitled to payments until sixty (60) days after such event and then only if such payment is permitted under clauses (a) and (b) above. (e) The holder of the Subordinated Debt undertakes and agrees for the benefit of each holder of Superior Indebtedness to execute, verify, deliver and file any proof of claim, consent, assignment or other instrument which any holder of Superior Indebtedness may at any time require in order to prove and realize upon any right or claim pertaining to the Subordinated Debt and to effectuate the full benefit of the subordination contained herein; and upon failure of the holder of the Subordinated Debt so to do prior to thirty (30) days before the expiration to file such claim any such holder of Superior Indebtedness shall be deemed to be irrevocably appointed the agent and attorney-in-fact of the holder of the Subordinated Debt to execute, verify, deliver and file any such proof of claim, consent, assignment or other instrument. (f) No right of any holder of any Superior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any failure to act on the part of the Company or any holder of Superior Indebtedness, or by any non-compliance by the Company with any term, provision or covenant of the subordinated notes or the agreement under which they are issued, regardless of any knowledge thereof that any such holder of Superior Indebtedness may have or be otherwise charged with. (g) The Company agrees, for the benefit of the holders of Superior Indebtedness, that in the event that the Subordinated Debt is declared due and payable before its expressed maturity because of the occurrence of a default thereunder or under the agreement under which it was issued, the Company will give prompt notice in writing of such happening to the holders of Superior Indebtedness. "Superior Indebtedness" means all obligations of the Company under or in connection with the Amended and Restated Credit Agreement, dated as of February 10, 2003 among CarMax Auto Superstores, Inc., CarMax, Inc., various financial institutions and DaimlerChrysler Services North America LLC ("DCSNA"), as agent (as amended, restated, amended and restated or otherwise modified from time to time, the "Credit Agreement"), whether for principal, interest (including any interest that would accrue after the filing of a petition initiating any bankruptcy, insolvency or like proceeding, whether or not such interest is an allowed claim enforceable against the debtor), fees, expenses or otherwise. E-2 EXHIBIT I FORM OF BORROWING BASE CERTIFICATE To: DaimlerChrysler Services North America LLC, as Agent Ladies and Gentlemen: Please refer to the Amended and Restated Credit Agreement dated as of February 10, 2003 (as amended or otherwise modified from time to time, the "Credit Agreement") among CarMax Auto Superstores, Inc. (the "Borrower"), CarMax, Inc. (the "Company"), various financial institutions and DaimlerChrysler Services North America LLC, as agent. This certificate (this "Certificate"), together with supporting calculations attached hereto, is delivered to you pursuant to the terms of the Credit Agreement. Capitalized terms used but not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Company hereby certifies and warrants to the Agent and the Lenders that at the close of business on _____________, 200_ (the "Calculation Date"), the Borrowing Base/5/ was $________________, computed as set forth on the schedule attached hereto. The Company hereby further certifies and warrants that as of the close of business on the Calculation Date the aggregate final cost of all Securitization Repossessions was less than 1% of the Borrowing Base./6/ IN WITNESS WHEREOF, the Company has caused this Certificate to be executed and delivered by its officer thereunto duly authorized on ____________, 200_. CARMAX, INC. By:______________________________________ Title:______________________________ - -------- /5/ See definition of Borrowing Base - such term does not include Motor Vehicles subject to any Lien, other than Permitted Liens of the type described in clauses (i), (ii), (iii) and (x) of the definition of Permitted Lien. The Borrowing Base shall not include any Motor Vehicle securing a Transferred Receivable (as defined in the Security Agreement), which Motor Vehicle has been returned to, repossessed by or foreclosed on by the Company or any Subsidiary. /6/ If the Company is unable to certify as set forth in this sentence, it must deduct the final cost of all Securitization Repossessions from the Borrowing Base. I-1 SCHEDULE TO BORROWING BASE CERTIFICATE Dated as of [________________________] Location Name New Used Wholesale Total - -------- ---- --- ---- --------- ----- TOTAL I-2 EX-10.9 6 dex109.txt AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10.9 [EXECUTION COPY] AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDMENT NO. 1 dated as of April 24, 2003 (this "Amendment") is entered into among CARMAX AUTO SUPERSTORES, INC., a Virginia corporation (the "Borrower"), CARMAX, INC., a Virginia corporation (the "Company"), DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, a Michigan limited liability company ("DCSNA"), in its capacity as a Lender and as agent for the Lenders, and TOYOTA MOTOR CREDIT CORPORATION, a California corporation, in its capacity as a Lender (together with DCSNA in such capacity, the "Lenders"). WHEREAS, the Borrower, the Company, the Lenders and DCSNA, as agent (in such capacity, the "Agent"), are parties to an Amended and Restated Credit Agreement dated as of February 10, 2003 (the "Existing Credit Agreement"); and WHEREAS, the Borrower and the Company have requested that the Lenders amend the Existing Credit Agreement on the terms and conditions set forth in this Amendment; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows: SECTION 1. DEFINITIONS. All capitalized terms used but not defined in this Amendment have the meanings assigned thereto in the Existing Credit Agreement. SECTION 2. AMENDMENTS TO EXISTING CREDIT AGREEMENT. Section 9.7 of the Existing Credit Agreement is hereby amended by deleting the word "and" at the end of subsection (g) of such section, by deleting subsection (h) of such section in its entirety and by adding the following subsections at the end of such section (solely for convenience, changed text is italicized): (h) all obligations, contingent or otherwise, with respect to the face amount of letters of credit (whether or not drawn) issued in connection with workers' compensation laws or similar legislation, provided that the aggregate stated amount of such letters of credit at any time outstanding shall not exceed $20,000,000; and (i) other Indebtedness, in addition to the Indebtedness listed above, in an aggregate principal amount not at any time exceeding $5,000,000. SECTION 3. AGREEMENT IN FULL FORCE AND EFFECT. Except as specifically amended by this Amendment, all of the terms and conditions of the Existing Credit Agreement shall remain in full force and effect. All references to the "Credit Agreement" in any other document or instrument shall be deemed to mean the Existing Credit Agreement as amended by this Amendment. This Amendment shall not constitute a novation of the Existing Credit Agreement. The parties hereto agree to be bound by the terms and obligations of the Existing Credit Agreement, as amended by this Amendment, as though the terms and obligations of the Existing Credit Agreement were set forth herein. SECTION 4. CONDITIONS PRECEDENT. This Amendment shall not become effective until the Agent shall have executed this Amendment and shall have received counterparts of this Amendment executed by the Borrower, the Company and each of the Lenders. SECTION 5. GOVERNING LAW. This Amendment shall be a contract made under and governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State. SECTION 6. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same agreement. -2- IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed and delivered by a duly authorized officer as of the day and year first above written. CARMAX AUTO SUPERSTORES, INC. By /s/ Keith D. Browning ----------------------------------- Title EVP and CFO ----------------------------- CARMAX, INC. By /s/ Keith D. Browning ----------------------------------- Title EVP and CFO ----------------------------- DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as Agent and as a Lender By /s/ R. D. Knight ----------------------------------- Title VP Credit ----------------------------- TOYOTA MOTOR CREDIT CORPORATION, as a Lender By /s/ P. Reid Boozer ---------------------------------- Title National Accounts Mgr. ----------------------------- -3- EX-10.10 7 dex1010.txt AMENDED AND RESTATED CREDIT SECURITY AGREEMENT EXHIBIT 10.10 EXECUTION COPY AMENDED AND RESTATED SECURITY AGREEMENT THIS AMENDED AND RESTATED SECURITY AGREEMENT (this "Agreement") dated as of February 10, 2003, is among CARMAX AUTO SUPERSTORES, INC. (the "Borrower"); the other persons or entities which are listed on the signature pages hereof as debtors or which from time to time become parties hereto as debtors (collectively, including the Borrower, the "Debtors" and individually each a "Debtor"); and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC ("DCSNA"), in its capacity as agent for the Lenders referred to below (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS, the Borrower, CarMax, Inc. (the "Company"), various financial institutions (the "Lenders") and the Agent have entered into an Amended and Restated Credit Agreement dated as of the date hereof (as amended or otherwise modified from time to time, the "Credit Agreement"), pursuant to which the Lenders have agreed to make extensions of credit to the Borrower; WHEREAS, each of the Debtors (other than the Borrower) has executed and delivered a guaranty (as amended or otherwise modified from time to time, the "Guaranty"; for the avoidance of doubt, such term includes the guaranty of the Company pursuant to the provisions of Section 14 of the Credit Agreement) of all obligations of the Borrower under the Credit Agreement; WHEREAS, the Debtors entered into a Security Agreement dated as of May 17, 2002 (the "Original Security Agreement") to secure their obligations under the Credit Agreement (in the case of the Borrower) and the Guaranty (in the case of the Debtors other than the Borrower); and WHEREAS, the obligations of the Borrower under the Credit Agreement and the obligations of each other Debtor under the Guaranty are to be secured pursuant to this Agreement; NOW, THEREFORE, for and in consideration of any loan, advance or other financial accommodation heretofore or hereafter made to the Borrower under or in connection with the Credit Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Original Security Agreement is hereby amended and restated, and the parties hereto agree, as follows: 1. Definitions. When used herein, (a) the terms, Account, Chattel Paper, Commercial Tort Claim, Deposit Account, Document, General Intangible, Instrument and Payment Intangible have the respective meanings assigned thereto in the UCC (as defined below); (b) capitalized terms used but not defined herein are used as defined in the Credit Agreement; and (c) the following terms have the following meanings (such definitions to be applicable to both the singular and plural forms of such terms): Assignee Deposit Account - see Section 4. Automobile Inventory means Motor Vehicles, and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor. Collateral means, with respect to any Debtor, all property and rights of such Debtor in which a security interest is granted hereunder. Collections means all payments and items of payment (including, without limitation, cash and Instruments) that are received by the Debtors from or on behalf of any Obligor in payment of any amounts owed (including invoice prices, finance charges, interest and all other charges, if any) in respect of any Receivable or Related Asset, or otherwise applied to repay or discharge any Receivable (including insurance payments that the Debtors apply in the ordinary course of its business to amounts owed in respect of such Receivable and net proceeds of sale or other disposition of repossessed goods that were the subject of such Receivable). Contracts means, with respect to any Receivable, the agreements (including, without limitation, Chattel Paper and Instruments) between the Debtors and the related Obligors governing the terms and conditions of such Receivable. Contributed Receivable means a Receivable contributed by a Debtor to an SPE in connection with a Securitization. Control Agreement Default means the occurrence of any of the following events: (a) any Event of Default or (b) any Unmatured Event of Default under Section 11.1.1 or 11.1.4 of the Credit Agreement. Default means the occurrence of any Event of Default. Intellectual Property means all past, present and future: trade secrets and other proprietary information; trademarks, service marks, trade names, business names, designs, logos, indicia and other source and/or business identifiers, and the goodwill of the business relating thereto and all registrations or applications for registration which have heretofore been or may hereafter be issued thereon throughout the world; copyrights (including copyrights for computer programs) and copyright registrations or applications for registration which have heretofore been or may hereafter be issued throughout the world and all tangible property embodying the copyrights; unpatented inventions (whether or not patentable); patent applications and patents; industrial designs, industrial design applications and registered industrial designs; license agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification sheets, source codes, object codes and other physical manifestations, embodiments or incorporations of any of the foregoing; the right to sue for all past, present and future infringements of any of the foregoing; and all common law and other rights throughout the world in and to all of the foregoing. 2 Liabilities means, as to each Debtor, all obligations (monetary or otherwise) of such Debtor under or in connection with the Credit Agreement, any Note, the Guaranty, any other Loan Document and any other document or instrument executed in connection therewith, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due. Obligor means a Person obligated to make payments on a Receivable. Purchased Receivable means a Receivable purchased by an SPE in a Securitization. Receivable means an Account, Chattel Paper, Document, General Intangible, Instrument or Payment Intangible arising from the sale or lease of Motor Vehicles. Related Assets means, with respect to any Receivable: (a) all Contracts that relate to such Receivable; (b) the merchandise (including returned merchandise), if any, relating to the sale which gave rise to such Receivable; (c) all other security interests or liens and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise; (d) all UCC financing statements covering any collateral securing payment of such Receivable; and (e) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise. Returned Goods means all right, title and interest of the Debtors in and to goods and/or merchandise, the sale of which gave rise to Receivables (other than Transferred Receivables), that have been returned to, repossessed by or foreclosed on by any Debtor. Subject Receivables means any Receivables, other than Transferred Receivables and Third Party Sold Receivables. Third Party Sold Receivables means Receivables sold by any Debtor to a Person not an SPE or an Affiliate in the ordinary course of business. Transferred Receivables means all Purchased Receivables and Contributed Receivables. UCC means the Uniform Commercial Code as in effect from time to time in the State of Michigan; provided that, as used in Section 10 hereof, "UCC" shall mean the Uniform Commercial Code as in effect from time to time in any applicable jurisdiction. 2. Grant of Security Interest. As security for the payment of all Liabilities, each Debtor hereby assigns to the Agent for the benefit of the Lenders, and grants to the Agent for the benefit of the Lenders a continuing security interest in, the following, whether now or hereafter existing or acquired: (i) all of such Debtor's Automobile Inventory; (ii) all of such Debtor's Subject Receivables; 3 (iii) all of such Debtor's rights against Manufacturers arising out of the purchase of Automobile Inventory from such Manufacturers; (iv) all of such Debtor's rights to receive payment (whether arising from any sale or other disposition or any collection or distribution) from any Person in connection with such Debtor's transfer of a Receivable to such Person, including, without limitation, all rights to payment pursuant to any agreement pursuant to which such Receivable was transferred to such Person (but excluding any right of such Debtor to receive payments in its capacity as servicer of a Transferred Receivable or of a Contract related to a Transferred Receivable); (v) all Collections received by such Debtor on account of any Subject Receivables; and (vi) all Deposit Accounts into which any payment or Collection on account of any Third Party Sold Receivable is paid, deposited or credited; together with all books, records, writings, data bases, information and other property relating to, used or useful in connection with, or evidencing, embodying, incorporating or referring to any of the foregoing, and all proceeds, products, offspring, rents, issues, profits and returns of and from, and any and all claims and/or insurance payments arising out of the loss, nonconformity or interference with the use of, defects or infringements of rights in, or damage to, any of the foregoing; provided that: (x) the property in which a security interest is granted hereunder shall not include or continue into any Transferred Receivable or Third Party Sold Receivable (or any Related Asset related to such Transferred Receivable or Third Party Sold Receivable); (y) nothing in the foregoing clause (x) shall be deemed to constitute a release by the Agent of: (A) its lien on and security interest in the proceeds received by any Debtor from or on behalf of any SPE or other Person for any sale of Receivables and Related Assets (including, without limitation, cash payments made by an SPE or other Person and any note or other Instrument issued by an SPE or other Person in favor of a Debtor in connection with any such sale), (B) any lien, claim, encumbrance or security interest the Agent may have in Subject Receivables or Collections of Subject Receivables, (C) any lien, claim, encumbrance or security interest the Agent may have as against any interest of a Debtor in Returned Goods, and (D) any other Collateral not constituting Transferred Receivables or Third Party Sold Receivables (or Related Assets related to such Transferred Receivables or Third Party Sold Receivables); and (z) so long as any Ford Restriction exists, the Collateral shall not include, and Kenosha shall be deemed not to have granted a security interest in, any New Motor Vehicle of the Ford, Lincoln or Mercury makes that is held by Kenosha. 3. Warranties. Each Debtor warrants that as of the date hereof (or as of the date such Debtor becomes a party hereto by delivering a counterpart hereof) and as of each date on 4 which the representations and warranties under the Credit Agreement and the other Loan Documents shall be made: (i) no financing statement (other than any which may have been filed on behalf of the Agent or in connection with liens expressly permitted by the Credit Agreement ("Permitted Liens")) covering any of the Collateral is on file in any public office; (ii) such Debtor is and will be the lawful owner of all Collateral in which it has granted a security interest hereunder, free of all liens and claims whatsoever, other than the security interest hereunder and Permitted Liens, with full power and authority to execute this Agreement and perform such Debtor's obligations hereunder, and to subject such Collateral to the security interest hereunder; (iii) all information with respect to such Collateral set forth in any schedule, certificate or other writing at any time heretofore or hereafter furnished by such Debtor to the Agent or any Lender is and will be true and correct in all material respects as of the date furnished; (iv) such Debtor's state of incorporation / organization, organizational identification number, chief executive office and principal place of business are as set forth on Schedule I hereto (and such Debtor has not maintained its chief executive office and principal place of business at any other location at any time after January 1, 2001); (v) each other location where such Debtor maintains a place of business is set forth on Schedule II hereto; (vi) except as set forth on Schedule III hereto, such Debtor is not now known and during the five years preceding the date hereof has not previously been known by any trade name; (vii) except as set forth on Schedule III hereto, during the five years preceding the date hereof such Debtor has not been known by any legal name different from the one set forth on the signature pages of this Agreement nor has such Debtor been the subject of any merger or other corporate reorganization; (viii) such Debtor is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation or a limited liability company duly formed and validly existing under the laws of the state of its organization; (ix) the execution and delivery of this Agreement and the performance by such Debtor of its obligations hereunder are within such Debtor's corporate or limited liability company powers, have been duly authorized by all necessary corporate or limited liability company action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the charter or by-laws or other organizational documents of such Debtor or of any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon such Debtor; (x) this Agreement is a legal, valid and binding obligation of such Debtor, enforceable against such Debtor in accordance with its terms, except that the enforceability of this Agreement may be limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (xi) such Debtor is in compliance in all material respects with the requirements of all applicable laws (including the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority; and (xii) each Debtor that owns Motor Vehicles covered by certificates of title is and shall continue to be in the business of selling goods of that kind. 4. Collections, etc. Until such time during the existence of a Default as the Agent shall notify such Debtor of the revocation of such power and authority, each Debtor may, in the ordinary course of its business, at its own expense, sell, lease or furnish under contracts of service any of the Automobile Inventory normally held by such Debtor for such purpose, use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by such Debtor for such purpose, and use, in the ordinary course of its business 5 (but subject to the terms of the Credit Agreement), the cash proceeds of Collateral and other money which constitutes Collateral. The Agent may, at any time that a Default exists, whether before or after any revocation of such power and authority or the maturity of any of the Liabilities, notify any parties obligated on any of the Subject Receivables to make payment to the Agent of any amounts due or to become due thereunder (but only if the applicable Debtor shall have failed, within two Business Days after having been requested in writing to do so by the Agent, to notify such parties to make payment of such amounts to the Agent) and enforce collection of any of the Subject Receivables by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. When any Debtor or any of its Affiliates (or any shareholder, director, officer, employee, agent or those Persons acting for or in concert with such Debtor or an Affiliate of such Debtor) shall receive or otherwise come into possession or control of any monies, checks, notes, drafts or other payment items (each, a "Payment Item") representing the purchase price of any Third Party Sold Receivable sold by such Debtor, then, except as otherwise permitted in a writing signed by the Agent, such Debtor shall, or shall cause such Affiliate or such other Person to, deposit the same in kind in precisely the form in which such Payment Item was received (with all Payment Items endorsed if necessary for collection) into a Deposit Account maintained in the United States of America with respect to which the depositary bank has executed the Control Agreement. Without limiting the foregoing, each Debtor selling any Third Party Sold Receivable shall instruct the purchaser thereof to remit the purchase price for such Receivable into such a Deposit Account. During the existence of a Control Agreement Default, the Agent may issue the Notice (as defined in the Control Agreement) pursuant to the Control Agreement. Upon request by the Agent during the existence of a Default, each Debtor will forthwith, upon receipt, transmit and deliver to the Agent, in the form received, all cash, checks, drafts and other instruments or writings for the payment of money (properly endorsed, where required, so that such items may be collected by the Agent) which may be received by such Debtor at any time in full or partial payment or otherwise as proceeds of any of the Collateral. Except as the Agent may otherwise consent in writing, any such items which may be so received by any Debtor will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and in express trust for the Agent until delivery is made to the Agent. Each Debtor will comply with the terms and conditions of any consent given by the Agent pursuant to the foregoing sentence. During the existence of a Default, all items or amounts which are delivered by any Debtor to the Agent on account of partial or full payment or otherwise as proceeds of any of the Collateral shall be deposited to the credit of a deposit account (each an "Assignee Deposit Account") of such Debtor with a financial institution selected by the Agent over which the Agent has sole dominion and control, as security for payment of the Liabilities. No Debtor shall have any right to withdraw any funds deposited in the applicable Assignee Deposit Account. The Agent may, from time to time, in its discretion, and shall upon request of the applicable Debtor made not more than once in any week, apply all or any of the then balance, representing collected funds, in the Assignee Deposit Account toward payment of the Liabilities, whether or not then due, in such order of application as the Agent may determine, and the Agent may, from time to time, in its discretion, release all or any of such balance to the applicable Debtor. 6 At any time that a Default exists, the Agent (or any designee of the Agent) is authorized to endorse, in the name of the applicable Debtor, any item, howsoever received by the Agent, representing any payment on or other proceeds of any of the Collateral. 5. Certificates, Schedules and Reports. Each Debtor will from time to time, as the Agent may request, deliver to the Agent such schedules, certificates and reports respecting all or any of the Collateral at the time subject to the security interest hereunder, and the items or amounts received by such Debtor in full or partial payment of any of the Collateral, as the Agent may reasonably request. Any such schedule, certificate or report shall be executed by a duly authorized officer of such Debtor and shall be in such form and detail as the Agent may reasonably specify. Each Debtor shall immediately notify the Agent of the occurrence of any event causing any loss or depreciation in the value of its Automobile Inventory or other assets which could reasonably be expected to have a Material Adverse Effect, and such notice shall specify the amount of such loss or depreciation. 6. Agreements of the Debtors. Each Debtor (a) hereby authorizes the Agent to file (with or without the signature of such Debtor), and will upon request of the Agent execute, such financing statements and other documents (and pay the cost of filing or recording the same in all public offices reasonably deemed appropriate by the Agent) and do such other acts and things, all as the Agent may from time to time reasonably deem necessary or request, to establish and maintain a valid security interest in the Collateral (free of all other liens, claims and rights of third parties whatsoever, other than Permitted Liens) to secure the payment of the Liabilities; (b) will keep all its Automobile Inventory at, will not change its state of incorporation / organization and will not maintain any place of business at any location other than, its state of incorporation / organization and address(es) shown on Schedules I and II hereto or in such other jurisdiction or at such other addresses of which such Debtor shall have given the Agent not less than thirty (30) days' prior written notice; (c) will not change its type of organization from that listed on the financing statements filed on behalf of the Agent or be the subject of any merger or other corporate reorganization unless the applicable Debtor shall have given the Agent not less than thirty (30) days' prior written notice; (d) will keep its records concerning the Subject Receivables in such a manner as will enable the Agent or its designees to determine at any time the status of the Subject Receivables; (e) will furnish the Agent such information concerning such Debtor and the Collateral as the Agent may from time to time reasonably request; (f) will permit the Agent and its designees, from time to time, on reasonable notice and at reasonable times and intervals during normal business hours (or at any time without notice during the existence of a Default) to inspect such Debtor's Automobile Inventory, and to inspect, audit and make copies of and extracts from all records and other papers in the possession of such Debtor pertaining to the Collateral; (g) will, upon request of the Agent, stamp on its records concerning the Collateral, and add on all Chattel Paper and Instruments constituting a portion of the Collateral, a notation, in form satisfactory to the Agent, of the security interest of the Agent hereunder; (h) except for the sale or lease of Automobile Inventory in the ordinary course of its business and for dispositions permitted by Section 9.10 of the Credit Agreement, will not sell, lease, assign or create or permit to exist any Lien on any Collateral other than Permitted Liens; (i) will at all times keep all of its Automobile Inventory insured as required by Section 9.3 of the Credit Agreement and cause all policies covering the Collateral to provide that loss thereunder shall be payable to the Agent as its interest may appear (it being understood that (A) so long as no Default shall be existing, the Agent shall deliver any proceeds of such insurance which may be 7 received by it to such Debtor and (B) whenever a Default shall be existing, the Agent may apply any proceeds of such insurance which may be received by it toward payment of the Liabilities, whether or not due, in such order of application as the Agent may determine), and such policies or certificates thereof shall, if the Agent so requests, be deposited with or furnished to the Agent; (j) will take such actions as are reasonably necessary to keep its Automobile Inventory in good repair and condition; (k) will take all steps reasonably necessary to protect, preserve and maintain all of its rights in the Collateral; (l) will keep all of the Automobile Inventory in the United States; (m) will not change its name without providing thirty (30) days' prior written notice to the Agent; (n) if such Debtor has any Commercial Tort Claim against any Manufacturer arising out of the purchase by such Debtor of Automobile Inventory from such Manufacturer, and the amount of such Commercial Tort Claim exceeds $500,000, such Debtor shall provide to the Agent a detailed description of such Commercial Tort Claim and this Agreement shall be amended to include a specific reference (sufficient under Section 9-108 of the UCC) to such Commercial Tort Claim; and (o) acknowledges and agrees that it is not authorized to file any financing statement in favor of the Agent without the prior written consent of the Agent and that it will not do so without the prior written consent of the Agent, subject to such Debtor's rights under Section 9-509(d)(2) of the UCC. Any expenses incurred in protecting, preserving or maintaining any Collateral shall be borne by the applicable Debtor, and each Debtor shall promptly, upon demand, reimburse and indemnify the Agent for all reasonable costs and expenses incurred by the Agent in the exercise of its rights under this Section 6. Notwithstanding the foregoing, the Agent shall have no obligation or liability regarding the Collateral or any thereof by reason of, or arising out of, this Agreement, except to the extent caused by the gross negligence or wilful misconduct of the Agent. 7. Default. During the existence of a Default, the Agent may exercise from time to time any right or remedy available to it under applicable law. Each Debtor agrees, in case of Default, to assemble, at its expense, all its Automobile Inventory that is not then located at one of the inventory locations listed on the inventory detail report most recently delivered pursuant to Section 9.1.10 of the Credit Agreement and make it available to the Agent at one or more of such locations. Any notification of intended disposition of any of the Collateral required by law shall be deemed reasonably and properly given if given at least ten days before such disposition. Any proceeds of any disposition by the Agent of any of the Collateral may be applied by the Agent to payment of expenses in connection with the Collateral, including Attorney Costs, and any balance of such proceeds may be applied by the Agent toward the payment of such of the Liabilities, and in such order of application, as the Agent may from time to time elect. 8. License of Intellectual Property. Each Debtor hereby grants to the Agent a non-exclusive and royalty-free right and license to use, during the existence of a Default, all of such Debtor's Intellectual Property throughout the world, solely for the purpose of enabling the Agent to exercise its rights and remedies hereunder including, without limitation, the right to use the Intellectual Property in connection with the disposition or maintenance of Automobile Inventory as the Agent deems necessary or appropriate. The Agent shall have the right to grant sublicenses to others to use the Intellectual Property during the existence of a Default and solely to enable such sublicensees to exercise any rights and remedies of the Agent under this Agreement, provided each such sublicensee agrees to be bound by an agreement similar to the next sentence. 8 The Agent agrees that it will, when exercising its rights under any Intellectual Property license hereunder, comply in all material respects with quality standards and specifications employed by the Debtors in commerce prior to the Initial Closing Date. 9. Limitation on Duty in Respect of Collateral. Beyond the exercise of reasonable care in the custody and preservation thereof, the Agent will have no duty as to any Collateral in its possession or control or in the possession or control of any sub-agent or bailee or any income therefrom or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as any applicable Debtor requests in writing, but failure of the Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of the Agent to preserve or protect any right with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by any Debtor, shall be deemed of itself a failure to exercise reasonable care in the custody or preservation of such Collateral. To the extent that applicable law imposes duties on the Agent to exercise remedies in a commercially reasonable manner, each Debtor acknowledges and agrees that it is not commercially unreasonable for the Agent (a) to fail to incur expenses reasonably deemed significant by the Agent to prepare Collateral for disposition or otherwise to complete raw material or work-in-process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against account debtors or other Persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against account debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other Persons, whether or not in the same business as the Debtors, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, including, without limitation, any warranties of title, merchantability or fitness for a particular purpose, (k) to purchase insurance or credit enhancements to insure the Agent against risks of loss, collection or disposition of Collateral, or to provide to the Agent a guaranteed return from the collection or disposition of Collateral or (l) to the extent deemed appropriate by the Agent, to obtain the services of brokers, investment bankers, consultants and other professionals to assist the Agent in the collection or disposition of any of the Collateral. Each Debtor acknowledges that the purpose of this Section is to provide non-exhaustive indications of what actions or omissions by the Agent would not be commercially unreasonable in the Agent's exercise of remedies against the Collateral and that other actions or omissions by the Agent shall not be deemed commercially unreasonable solely on account of not being specifically referred to in this Section. Without 9 limitation upon the foregoing, nothing contained in this Section shall be construed to grant any right to a Debtor or to impose any duties on the Agent that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section. 10. General. All notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown below its signature hereto or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. Each of the Debtors agrees to pay all reasonable expenses, including Attorney Costs, paid or incurred by the Agent or any Lender in endeavoring to collect the Liabilities of such Debtor, or any part thereof, and in enforcing this Agreement against such Debtor, and such obligations will themselves be Liabilities. No delay on the part of the Agent in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Agent of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. This Agreement shall remain in full force and effect until all Liabilities have been paid in full and all Commitments have terminated. If at any time all or any part of any payment theretofore applied by the Agent or any Lender to any of the Liabilities is or must be rescinded or returned by the Agent or such Lender for any reason whatsoever (including the insolvency, bankruptcy or reorganization of any Debtor), such Liabilities shall, for the purposes of this Agreement, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Agent or such Lender, and this Agreement shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Agent or such Lender had not been made. This Agreement shall be construed in accordance with and governed by the laws of the State of Michigan applicable to contracts made and to be performed entirely within such State (except to the extent that perfection, the effect of perfection or nonperfection, or the priority of the security interests granted hereunder may be determined by the UCC of a different jurisdiction). Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. The rights and privileges of the Agent hereunder shall inure to the benefit of its successors and assigns. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an 10 original, but all such counterparts shall together constitute one and the same Agreement. At any time after the date of this Agreement, one or more additional Persons may become parties hereto by executing and delivering to the Agent a counterpart of this Agreement together with supplements to the Schedules hereto setting forth all relevant information with respect to such party as of the date of such delivery. Immediately upon such execution and delivery (and without any further action), each such additional Person will become a party to, and will be bound by all the terms of, this Agreement. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MICHIGAN AND OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN FOR THE PURPOSE OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. EACH DEBTOR FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH BELOW ITS SIGNATURE HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE AGENT AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF MICHIGAN. EACH DEBTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF EACH DEBTOR, THE AGENT AND (BY ACCEPTING THE BENEFITS HEREOF) EACH LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 11 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. DEBTORS: CARMAX, INC. By: /s/ Keith D. Browning ------------------------------------------ Title: Executive VP and CFO --------------------------------------- Address: ------------------------------------- ------------------------------------- ------------------------------------- Attention: ----------------------------------- Telephone: ----------------------------------- Facsimile: ----------------------------------- CARMAX AUTO SUPERSTORES, INC. By: /s/ Keith D. Browning ------------------------------------------ Title: Executive VP and CFO --------------------------------------- Address: ------------------------------------- ------------------------------------- ------------------------------------- Attention: ----------------------------------- Telephone: ----------------------------------- Facsimile: ----------------------------------- CARMAX AUTO SUPERSTORES WEST COAST, INC. By: /s/ Keith D. Browning ------------------------------------------ Title: Chairman, President and CFO --------------------------------------- Address: ------------------------------------- ------------------------------------- ------------------------------------- S-1 Attention: ----------------------------------- Telephone: ----------------------------------- Facsimile: ----------------------------------- KENOSHA AUTOMOTIVE, LLC By: /s/ Keith D. Browning ------------------------------------------ Title: CFO, Vice President and Treasurer --------------------------------------- Address: ------------------------------------- ------------------------------------- ------------------------------------- Attention: ----------------------------------- Telephone: ----------------------------------- Facsimile: ----------------------------------- CARMAX AUTO MALL, LLC By: /s/ Keith D. Browning ------------------------------------------ Title: CFO, Vice President and Treasurer --------------------------------------- Address: ------------------------------------- ------------------------------------- ------------------------------------- Attention: ----------------------------------- Telephone: ----------------------------------- Facsimile: ----------------------------------- CARMAX OF LAUREL, LLC By: /s/ Keith D. Browning ------------------------------------------ Title: CFO, Vice President and Treasurer --------------------------------------- Address: ------------------------------------- ------------------------------------- ------------------------------------- Attention: ----------------------------------- Telephone: ----------------------------------- Facsimile: ----------------------------------- S-2 AGENT: DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as Agent By: /s/ R. D. Knight ------------------------------------------ Title: Vice President Credit --------------------------------------- Address: 27777 Inkster Road Farmington Hills, Michigan 48334-5362 CIMS 405-23-05 Attention: Jeff Canizaro Telephone: (248) 427-6511 Facsimile: (248) 427-6550 S-3 Signature page for the Amended and Restated Security Agreement (the "Security Agreement") dated as of February 10, 2003 among CARMAX AUTO SUPERSTORES, INC., CARMAX, INC. (the "Company"), various subsidiaries of the Company and DAIMLERCHRYSLER SERVICES NORTH AMERICA LLC, as Agent. The undersigned is executing a counterpart hereof for purposes of becoming a party hereto (and attached to this signature page are supplements to the Schedules to the Security Agreement setting forth all relevant information with respect to the undersigned): [ADDITIONAL DEBTOR] By:__________________________________________ Title:_______________________________________ Address: Attention: Telephone: Facsimile: S-4 SCHEDULE I TO AMENDED AND RESTATED SECURITY AGREEMENT JURISDICTION OF INCORPORATION / ORGANIZATION ORGANIZATIONAL IDENTIFICATION NUMBER / CHIEF EXECUTIVE OFFICES

I-1 SCHEDULE II TO AMENDED AND RESTATED SECURITY AGREEMENT ADDRESSES CarMax Auto Superstores, Inc. 2000 Highridge Road Boynton Beach, FL 33426 2550 Roosevelt Blvd. Clearwater, FL 33760 7420 State Road 84 Davie, FL 33317 1300 NW 98th Court Miami, FL 33172 6375 South Semoran Boulevard Orlando, FL 32822 14920 North Nebraska Avenue Tampa, FL 33613 1215 Ernest Barrett Parkway Kennesaw, GA 30144 1975 Beaver Ruin Road Norcross, GA 30071 3100 Mount Zion Parkway Stockbridge, GA 30281 101 North Wolf Road Hillside, IL 60162 3320 Odyssey Court Naperville, IL 60656 6540 West 95th Street Oak Lawn, IL 60453 250 East Golf Road Schaumburg, IL 60173 18800 South Oak Park Avenue Tinley Park, IL 60477 1370 East 79th Place Merrillville, IN 46410 8800 Freestate Drive Laurel, MD 20723 8801 Freestate Drive Laurel, MD 20723 II-1 CarMax Auto Superstores, Inc. 15931 Frederick Road (cont'd) Rockville, MD 20855 10201 Philadelphia Road White Marsh, MD 21162 7700 Krefeld Drive Charlotte, NC 28227 3412 West Wendover Avenue Greensboro, NC 27407 10510 Cadillac Street Pineville, NC 28134 8520 Glenwood Avenue Raleigh, NC 27612 2800 Laurens Road Greenville, SC 29607 11225 Parkside Drive Knoxville, TN 37922 2501 Powell Avenue Nashville, TN 37204 8400 Anderson Boulevard Ft.Worth, TX 76120 12715 LBJ Freeway Garland, TX 75041 13100 Gulf Freeway Houston, TX 77034 19500 Northwest Freeway Houston, TX 77065 6909 Southwest Freeway Houston, TX 77074 16110 North Freeway Houston, TX 77090 3100 Spur 482 Irving, TX 75062 4448 West Plano Parkway Plano, TX 75093 3611 Fountainhead Drive San Antonio, TX 78229 11090 West Broad Street Glen Allen, VA 23060 II-2 CarMax Auto Superstores, Inc. 45210 Towlern Place (cont'd) Sterling, VA 20166 8200 120th Avenue Kenosha, WI 53142 CarMax Auto Superstores West Coast, Inc. 1131 Central Avenue Duarte, CA 91010 1030 West Manchester Boulevard Inglewood, CA 90301 1450 Eureka Road Roseville, CA 95661 II-3 SCHEDULE III TO AMENDED AND RESTATED SECURITY AGREEMENT TRADE NAMES, PRIOR LEGAL NAMES, ETC. Name of Entity Trade Names (for previous 5 years) - --------------------------------------------- ---------------------------------- CarMax Auto Superstores, Inc. CarMax Auto Finance First North American Credit First North American Credit Corp. Name of Entity Legal Names (for previous 5 years) - --------------------------------------------- ---------------------------------- CarMax Auto Superstores West Coast, Inc. C-Max Auto Superstores, Inc. CarMax Funding Corporation, a Virginia corporation, was merged into CarMax Auto Superstores, Inc. on February 28, 1999. III-1 EX-13.1 8 dex131.htm CARMAX'S ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED FEBRUARY 28, 2003 Carmax's Annual Report to Shareholders for fiscal year ended February 28, 2003

Exhibit 13.1

SELECTED FINANCIAL DATA

	FY03		FY02		FY01		FY00			FY99			FY98			FY97			FY96			FY95			FY94
	(Dollars in millions except per share data)
Net Sales and Operating Revenues	$	3,969.9	$	3,533.8	$	2,758.5	$	2,201.2		$	1,607.3		$	950.7		$	566.7		$	327.1		$	93.5		$	20.5
Net Earnings (Loss)	$	94.8	$	90.8	$	45.6	$	1.1		$	(23.5	)	$	(34.2	)	$	(9.3	)	$	(5.2	)	$	(4.1	)	$	(1.8	)
Net Earnings (Loss) Per Share:
Basic	$	0.92	$	0.89	$	0.45	$	0.01		$	(0.24	)	$	(0.35	)	$	(0.10	)		N/A			N/A			N/A
Diluted	$	0.91	$	0.87	$	0.44	$	0.01		$	(0.24	)	$	(0.35	)	$	(0.10	)		N/A			N/A			N/A
Total Assets	$	917.6	$	720.2	$	711.0	$	675.5		$	571.2		$	448.3		$	427.2		$	102.6		$	114.3		$	25.3
Long-Term Debt, Excluding Current Installments	$	100.0	$	—	$	83.1	$	121.3		$	139.7		$	27.4		$	—		$	78.5		$	111.6		$	24.4

Used Units Sold		190,100		164,000		132,900		111,200			96,900			56,600			31,700			19,600			5,600			1,300
New Units Sold		22,400		24,200		20,100		17,800			6,200			4,300			2,800			—			—			—

Comparable Store Used Unit Growth(%)		8		24		13		(8	)		(5	)		6			7			12			19			—
Comparable Store Vehicle Dollar Growth(%)		6		28		17		2			(2	)		6			23			12			43			—
Total Sales Growth(%)		12		28		25		37			69			68			73			250			356			—

Used Car Superstores at Year-End		40		35		33		33			29			18			7			4			2			1
Retail Stores at Year-End		44		40		40		40			31			18			7			4			2			1
Associates at Year-End		8,263		7,196		6,065		5,676			4,789			3,605			1,614			903			146			136

MANAGEMENT’S DISCUSSION AND ANALYSIS

In this discussion, “we,” “our,” “CarMax,” “CarMax, Inc.” and “the company” refer to CarMax, Inc. and its wholly owned subsidiaries, unless the context requires otherwise. Amounts and percents in the tables may not total due to rounding.

BACKGROUND

CarMax was formerly a wholly owned subsidiary of Circuit City Stores, Inc. (“Circuit City Stores”). On September 10, 2002, the Circuit City Stores shareholders, which included Circuit City Stores, Inc.—Circuit City Group Common Stock shareholders and Circuit City Stores, Inc.—CarMax Group Common Stock shareholders, approved the separation of the CarMax business from Circuit City Stores, and the Circuit City Stores board of directors authorized the redemption of the CarMax Group Common Stock and the distribution of CarMax, Inc. common stock to effect the separation. The separation was effective October 1, 2002. Each outstanding share of CarMax Group Common Stock was redeemed in exchange for one share of new CarMax, Inc. common stock. In addition, each holder of Circuit City Group Common Stock received, as a tax-free distribution, a 0.313879 share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock owned as of September 16, 2002, the record date for the distribution. As a result of the separation, all of the businesses, assets and liabilities of the CarMax Group are now held in CarMax, Inc., an independent, separately traded public company.

CRITICAL ACCOUNTING POLICIES

In Management’s Discussion and Analysis, we discuss the results of operations and financial condition as reflected in the company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. We use our historical experience and other relevant factors when developing our estimates and assumptions. We continually evaluate these estimates and assumptions. Note 2 to the company’s consolidated financial statements includes a discussion of significant accounting policies. The accounting policies discussed below are the ones we consider critical to an understanding of the company’s consolidated financial statements because their application places the most significant demands on our judgment. Our financial results might have been different if different assumptions had been used or other conditions had prevailed.

Calculation of the Fair Value of Retained Interests in Securitization Transactions

The company uses a securitization program to fund substantially all of the automobile loan receivables originated by its finance operation, CarMax Auto Finance (“CAF”). The fair value of retained interests in securitization transactions includes the present value of the expected residual cash flows generated by the securitized receivables, the restricted cash on deposit in various reserve accounts and an undivided ownership interest in the receivables securitized through a warehouse facility. The present value of the expected residual cash flows generated by the securitized receivables is determined by estimating the future cash flows using management’s projections of key factors, such as finance charge income, default rates, prepayment rates and discount rates appropriate for the type of asset and risk. These projections are derived from historical experience, projected economic trends and anticipated interest rates. Adjustments to one or more of these projections may have a material impact on the fair value of retained interests. The fair value of retained interests may be affected by external factors, such as changes in the behavior patterns of customers, changes in the strength of the economy and developments in the interest rate markets. Note 2(C) to the company’s consolidated financial statements includes a discussion of accounting policies related to securitizations. Note 12 to the company’s consolidated financial statements includes a discussion of securitizations.

Revenue Recognition

We recognize revenue when the earnings process is complete, generally either at the time of sale to a customer or upon delivery to a customer. The majority of our revenue is from the sales of used and new vehicles. We recognize vehicle revenue when a sales contract has been executed and the vehicle has been delivered, net of a reserve for returns. A reserve for vehicle returns is recorded based on historical experience and trends. The estimated reserve for these returns could be affected if future occurrences differ from historical averages.

The company also sells extended warranties on behalf of unrelated third parties to customers who purchase a vehicle. Because these third parties are the primary obligors under these contracts, the company recognizes extended warranty revenue at the time of the sale, net of a provision for estimated warranty returns. The estimates for returns are based on historical experience and trends.

Defined Benefit Retirement Plans

The plan obligations and related assets of the company’s defined benefit retirement plans are presented in Note 8 to the company’s consolidated financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined by independent actuaries using a number of assumptions provided by the company. Key assumptions in measuring the plan obligations include the discount rate, the rate of salary increases and the estimated future return on plan assets. In determining the discount rate, the company utilizes the yield

on high-quality, fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are based upon historical experience and anticipated future board and management actions. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plan.

Insurance Liabilities

The company uses a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by its associates. The company determines the estimates for the liabilities associated with these risks by considering historical claims experience, demographic factors and other actuarial assumptions. The estimated accruals for these liabilities could be affected if future occurrences and claims differ from the current assumptions and historical trends.

RESULTS OF OPERATIONS

Certain prior year amounts have been reclassified to conform to the current presentation. Wholesale sales were reclassified and reported in net sales and operating revenues. In previous periods, wholesale sales were recorded as a reduction to cost of sales. An additional reclassification between sales and cost of sales made to conform to the current presentation decreased sales and cost of sales. Third-party finance fees were reclassified and reported in net sales and operating revenues. In previous periods, third-party finance fees were recorded as a reduction to selling, general and administrative expenses. Additionally, CarMax Auto Finance income is presented separately in the consolidated statements of earnings. Previously, CarMax Auto Finance income was recorded as a reduction to selling, general and administrative expenses. These reclassifications had no impact on the company’s net earnings. Note 2(T) to the company’s consolidated financial statements includes further discussion of the reclassifications.

Net Sales and Operating Revenues

Total sales increased 12% in fiscal 2003 to $3.97 billion. In fiscal 2002, total sales increased 28% to $3.53 billion from $2.76 billion in fiscal 2001. Net sales and operating revenues components are shown in Table 1 below.

TABLE 1

	2003		%	2002		%	2001		%
	(Amounts in millions)
Used vehicle sales	$	2,912.1		$	2,497.2		$	1,928.4
New vehicle sales		519.8			559.9			456.9

Total retail vehicle sales		3,431.9	86.4		3,057.1	86.5		2,385.3	86.5

Wholesale vehicle sales		366.6	9.2		325.6	9.2		253.5	9.2

Other sales and revenues:
Extended warranty revenues		68.1			55.3			45.0
Service department sales		58.6			55.9			44.8
Appraisal purchase processing fees		28.5			24.2			18.5
Third-party finance fees		16.2			15.7			11.5

Total other sales and revenues		171.4	4.3		151.1	4.3		119.7	4.3

Total net sales and operating revenues	$	3,969.9	100.0	$	3,533.8	100.0	$	2,758.5	100.0

Total Retail Vehicle Sales. Total retail vehicle sales increased 12% in fiscal 2003 to $3.43 billion. In fiscal 2002, total retail vehicle sales increased 28% to $3.06 billion from $2.39 billion in fiscal 2001. In fiscal 2003, used vehicles sales increased 17% to $2.91 billion. In fiscal 2002, used vehicle sales increased 29% to $2.50 billion from $1.93 billion in fiscal 2001. New vehicle sales in fiscal 2003 decreased 7% to $519.8 million. In fiscal 2002, new vehicle sales were $559.9 million, up 23% over fiscal 2001 sales of $456.9 million.

Comparable store used unit sales growth is a primary driver of our profitability. For fiscal 2003, the overall increase in retail vehicle sales reflects the growth in comparable store used unit sales and the revenue from seven stores opened since the beginning of February 2002. For fiscal 2003, we were able to achieve comparable store used unit sales growth of 8% on top of last year’s exceptional 24%. This comparable store used unit growth resulted from strong sales execution and the continued benefits of effective marketing programs, carmax.com and word-of-mouth customer referrals experienced in fiscal 2002. The comparable store used unit sales growth was slightly impacted by reduced approval rates from our non-prime customer loan providers during the fourth quarter of fiscal 2003. Comparable store new unit sales were down 3% in fiscal 2003. This was generally in line with the new car industry’s performance as that industry continued to struggle with comparisons to the unprecedented traffic driven by zero-percent financing promotions that were introduced in fiscal 2002.

The fiscal 2002 total retail vehicle sales growth primarily resulted from a 24% increase in comparable store used unit sales and a 21% increase in comparable store new unit sales. The company opened two used car superstores during the last month of fiscal 2002, so they were not significant contributors

to sales growth in fiscal 2002. The growth in total comparable store vehicle units reflects increased store traffic that, combined with better in-store execution, resulted in comparable store unit sales growth for both used and new cars. We believe that the higher traffic levels were driven by the effectiveness of our marketing programs, carmax.com and word-of-mouth customer referrals. In addition, traffic was bolstered in October, November and December by cross-shopping from zero-percent financing incentive programs introduced by new car manufacturers to counteract an industry-wide slowdown in new car sales. Increased used car average retail prices resulting from a higher mix of later-model used cars, luxury vehicles and sport utility vehicles and higher new car average retail prices also contributed to the sales growth.

A CarMax store is included in comparable store retail sales after the store has been open for a full year (in the store’s fourteenth full month of operation).

Comparable Store Retail Vehicle Sales Change

Fiscal	2003		2002		2001
Vehicle units:
Used vehicles	8	%	24	%	13	%
New vehicles	(3	)%	21	%	9	%
Total	6	%	23	%	12	%
Vehicle dollars:
Used vehicles	8	%	30	%	19	%
New vehicles	(3	)%	24	%	9	%
Total	6	%	28	%	17	%

Percent Retail Vehicle Sales

Fiscal	2003		2002		2001
Vehicle units:
Used vehicles	89	%	87	%	87	%
New vehicles	11		13		13

Total	100	%	100	%	100	%

Vehicle dollars:
Used vehicles	85	%	82	%	81	%
New vehicles	15		18		19

Total	100	%	100	%	100	%

Retail Unit Sales

Fiscal	2003	2002	2001
Used vehicles	190,100	164,000	132,900
New vehicles	22,400	24,200	20,100

Total	212,500	188,200	153,000

Average Retail Selling Prices

Fiscal	2003		2002		2001
Used vehicles	$	15,200	$	15,100	$	14,400
New vehicles	$	23,200	$	23,100	$	22,600
Total vehicles	$	16,100	$	16,200	$	15,500

Wholesale Vehicle Sales. CarMax’s operating strategy is to build customer confidence and satisfaction by offering high-quality vehicles; therefore, fewer than half of the vehicles acquired from consumers through the appraisal purchase process meet our standards for reconditioning and subsequent retail sale. Those vehicles that do not meet our standards are sold at our on-site wholesale auctions. Total wholesale vehicle units sold at these auctions were 104,600 in fiscal 2003; 90,900 in fiscal 2002; and 73,300 in fiscal 2001. Wholesale vehicle sales totaled $366.6 million in fiscal 2003, $325.6 million in fiscal 2002 and $253.5 million in fiscal 2001. The increase in fiscal 2003 resulted from an increase in the rate of acceptance of our vehicle appraisal offer. The impact of this increase was partially offset by lower average wholesale prices. The increase in fiscal 2002 resulted from an increase in the number of appraisals performed while the rate of customer acceptance of the appraisal offer remained consistent with fiscal 2001.

Other Sales and Revenues. Other sales and revenues include extended warranty revenues, service department sales, appraisal purchase processing fees collected from customers for the purchase of their vehicles and third-party finance fees. These totaled $171.4 million in fiscal 2003, $151.1 million in fiscal 2002 and $119.7 million in fiscal 2001.

CarMax sells extended warranties on behalf of unrelated third parties who are the primary obligors. Under these third-party warranty programs, the company has no contractual liability to the customer. Extended warranty revenue represents commissions from the unrelated third parties and was $68.1 million in fiscal 2003, $55.3 million in fiscal 2002 and $45.0 million in fiscal 2001. These increases in warranty revenue reflect improved penetration, a result in part of the continuing enhancement of the extended warranty offer, and strong sales growth for used cars, which achieve a higher extended warranty penetration rate than new cars.

Service department sales were $58.6 million in fiscal 2003, $55.9 million in fiscal 2002 and $44.8 million in fiscal 2001. The increase in service department sales for fiscal 2003 reflects the continued overall increase in CarMax’s customer base, offset modestly by the initial effect of a rollout of the new electronic repair order system to our stores. As each store implemented the new electronic repair order system, service department sales were impacted based on the time required for the training of service managers and technicians. The increase in fiscal 2002 relates to an overall increase in CarMax’s customer base.

Appraisal purchase processing fees were $28.5 million in fiscal 2003, $24.2 million in fiscal 2002 and $18.5 million in fiscal 2001. Appraisal purchase processing fees collected from customers are designed to cover some of the costs of our appraisal and wholesale operations. The increase in fiscal 2003 resulted from the increased consumer response to the vehicle appraisal offer. The increase in fiscal 2002 was the result of increased traffic, increased consumer response to the vehicle appraisal offer and an increase in the fee amount.

CarMax provides financing for prime-rated customers through CAF, its finance operation, and through third-party lenders, one that provides financing to prime-rated customers and three that provide financing to non-prime-rated customers. Offering customers a third-party alternative for prime loans enhances the CarMax consumer offer and helps to ensure that CAF remains competitive. Third-party finance fees are fees received from third-party lenders who finance CarMax customers’ automobile loans. Third-party finance fees were $16.2 million in fiscal 2003, $15.7 million in fiscal 2002 and $11.5 million in fiscal 2001. The increase in fiscal 2003 was the result of the increase in used car sales, partially offset by the decline in new car sales and CAF’s capturing of prime customer market share from the third-party prime lender. The increase in fiscal 2002 was the result of the increase in retail sales, especially new car sales.

Impact of Inflation. Inflation has not been a significant contributor to results. Profitability is based on achieving specific gross profit dollars per vehicle rather than on average retail prices. Because the wholesale market for late-model used cars adjusts to reflect retail price trends, we believe that if the stores meet inventory turn objectives, then changes in average retail prices will have only a short-term impact on the gross margin and thus profitability.

Retail Stores. During fiscal 2003, we opened two standard-sized used car superstores and three prototype satellite superstores. We also integrated one of our stand-alone DaimlerChrysler franchises with a standard-sized used car superstore and sold a co-located Nissan franchise.

Retail Stores

	Retail Stores at Year End
Fiscal	2003	2002	2001
Mega superstores	13	13	13
Standard superstores	19	17	16
Prototype satellite superstores	8	5	4
Co-located new car stores	2	2	2
Stand-alone new car stores	2	3	5

Total	44	40	40

New Car Franchises

	New Car Franchises at Year End
Fiscal	2003	2002	2001
Integrated/co-located new car franchises	15	15	17
Stand-alone new car franchises	2	3	5

Total	17	18	22

Gross Profit Margin

Total gross profit margin was 11.8% in fiscal 2003, 11.9% in fiscal 2002 and 12.4% in fiscal 2001.

Retail Vehicle Gross Profit Margin. The gross profit margin for retail vehicle sales was 9.7% in fiscal 2003 and fiscal 2002 and 10.2% in fiscal 2001. The retail vehicle gross profit margin dollars per retail unit sold were $1,570 in fiscal 2003, $1,580 in fiscal 2002 and $1,590 in fiscal 2001.

Used Vehicle Gross Profit Margin. Used vehicle gross margins were 10.8% in fiscal 2003, 10.9% in fiscal 2002 and 11.4% in fiscal 2001. The used vehicle gross profit margin dollars per used unit sold were $1,650 in fiscal 2003 and $1,660 in fiscal 2002 and 2001. In fiscal 2002, although CarMax achieved its specific used vehicle gross profit dollar targets per vehicle, increased average retail prices resulting from a higher mix of later-model used cars, luxury vehicles and sport utility vehicles generated the decline in gross profit as a percentage of sales. Used vehicle gross profit dollars are similar across makes and models. Consequently, the gross profit on a higher-priced used vehicle is a lower percentage of the retail selling price than on a more modestly priced vehicle.

New Vehicle Gross Profit Margin. New vehicle gross margins were 4.0% in fiscal 2003, 4.5% in fiscal 2002 and 5.1% in fiscal 2001. The new vehicle gross profit margin dollars per new unit sold were $930 in fiscal 2003, $1,050 in fiscal 2002 and $1,160 in fiscal 2001. In fiscal 2003, the new car margin decline reflected increased competition, which required more aggressive pricing in order to drive unit sales volume. In fiscal 2002, the new vehicle gross margin decrease was attributable to increases in average retail prices along with a more competitive marketplace.

Wholesale Vehicle Gross Profit Margin. The wholesale gross profit margin is intended to cover the expenses of operating the auctions and their related costs. The gross profit margin for wholesale vehicle sales was 5.5% in fiscal 2003, 5.6% in fiscal 2002 and 6.5% in fiscal 2001. The wholesale vehicle gross profit margin dollars per wholesale unit sold were $190 in fiscal 2003, $200 in fiscal 2002 and $220 in fiscal 2001. The decrease in gross profit margin in fiscal 2002 from fiscal 2001 reflected the negative impact of the rapid decline in the wholesale market after September 11, 2001.

Other Gross Profit Margin. Gross profit margin for other sales and revenues was 66.5% in fiscal 2003, 68.3% in fiscal 2002 and 68.0% in 2001. The decrease in other gross profit margin in fiscal 2003 was due to increased costs and relatively flat sales for the service department in the second half of the fiscal year, reflecting the initial effect of the rollout of our new electronic repair order system to all of our stores. In months when rollouts occur, store service sales and costs are impacted. The electronic repair order system enhances our reconditioning efficiency and is expected to enhance the service department and improve customer service.

CarMax Auto Finance Income

CarMax Auto Finance is the company’s finance operation. CAF’s lending business is limited to providing prime auto loans for CarMax’s used and new car sales. Because the purchase of an automobile traditionally is reliant on the consumer’s ability to obtain on-the-spot financing, it is important to our business that such financing be available to credit-worthy customers. While this financing can also be obtained from third-party sources, we are concerned that total reliance on third parties can create an unacceptable volatility and business risk. Furthermore, we believe that our processes and systems, the transparency of our pricing and vehicle quality provide a unique and ideal environment in which to procure high-quality auto loan receivables, both for CAF and for third-party lenders. CAF provides CarMax with the opportunity to capture additional profits and cash flows from auto loan receivables while managing our reliance on third-party finance sources.

CAF income does not include any allocation of indirect costs or income. We present this information on a direct basis to avoid making arbitrary decisions regarding the indirect benefit or costs that could be attributed to this operation. Examples of indirect costs not included are retail store expenses, retail financing commissions and corporate expenses such as human resources, administrative services, marketing, information systems, accounting, legal, treasury and executive payroll.

CAF originates automobile loans to CarMax consumers at competitive market rates of interest. The majority of the profit contribution from CAF is generated by the spread between the interest rate charged to the consumer and the cost of funds. Substantially all of the loans originated each month are sold in a monthly securitization transaction as described in Note 12 to the company’s consolidated financial statements. A gain results from recording a receivable equal to the present value of the expected residual cash flows generated by the securitized receivables. The cash flows are calculated taking into account expected prepayment and default rates.

CarMax Auto Finance income increased 24% in fiscal 2003 to $82.4 million. In fiscal 2002, CAF income increased 56% to $66.5 million from $42.7 million in fiscal 2001. The increase in fiscal 2003 was a result of an $11.8 million increase in the gains on sales of loans and an increase in other income related to our managed portfolio. The gains on sales of loans increase resulted from an increase in loans sold driven by a higher sales volume and higher CAF penetration, partially offset by a marginal decline in yield spreads. The increase in fiscal 2002 was primarily the result of a $21.0 million increase in gains on sales of loans and an increase in other income related to our managed portfolio. The gains on sales of loans increase resulted from an increase in loans sold driven by higher sales combined with an increase in yield spreads driven by the favorable interest rate environment. The increase in other income and total direct expenses was proportionate to the increase in the managed receivables for fiscal years 2003 and 2002.

CarMax Auto Finance Income

	2003		%	2002		%	2001		%
	(Amounts in millions)
Gains on sales of loans(1)	$	68.2	5.8	$	56.4	6.0	$	35.4	4.3

Other income(2):
Servicing fee income		17.3	1.0		14.0	1.0		10.8	1.0
Interest income		11.5	0.7		7.7	0.6		5.2	0.5

Total other income		28.8	1.7		21.7	1.6		16.0	1.5

Direct expenses(2):
CAF payroll and fringes expense		7.0	0.4		5.7	0.4		4.2	0.4
Other direct CAF expenses		7.6	0.4		5.9	0.4		4.5	0.4

Total direct expenses		14.6	0.9		11.6	0.8		8.7	0.8

Total income(3)	$	82.4	2.1	$	66.5	1.9	$	42.7	1.5

Loans sold	$	1,185.9		$	938.5		$	818.7
Average managed receivables	$	1,701.0		$	1,393.7		$	1,088.9
Net sales and operating revenues	$	3,969.9		$	3,533.8		$	2,758.5
Ending managed receivables balance	$	1,878.7		$	1,503.3		$	1,227.0

Percent columns indicate:

(1)

Percent of loans sold

(2)

Annualized percent of average managed receivables

(3)

Percent of net sales and operating revenues

The company is at risk for the performance of the securitized receivables managed to the extent that it maintains a retained interest in the receivables. Supplemental information on our portfolio of managed receivables is shown in the following tables:

	As of February 28
	2003			2002			2001
	(Amounts in millions)
Loans securitized	$	1,859.1		$	1,489.4		$	1,215.4
Loans held for sale or investment		19.6			13.9			11.6

Ending managed receivables	$	1,878.7		$	1,503.3		$	1,227.0

Accounts 31+ days past due	$	27.6		$	22.3		$	18.1
Past due accounts as a percentage of ending managed receivables		1.5	%		1.5	%		1.5	%

	Years Ended February 28
	2003			2002			2001
	(Amounts in millions)
Average managed receivables	$	1,701.0		$	1,393.7		$	1,088.9
Credit losses on managed receivables	$	17.5		$	12.9		$	7.2
Annualized losses as a percentage of average managed receivables		1.0	%		0.9	%		0.7	%

The increase in annualized losses as a percent of average managed receivables for fiscal 2003 compared with fiscal 2002 was primarily due to depressed wholesale vehicle values which lead to lower recovery rates on repossessed vehicles. The increase in fiscal 2002 annualized losses as a percent of average managed receivables from fiscal 2001 was due to a moderation in the growth of our portfolio combined with general economic factors causing lower recovery rates on repossessed vehicles. The recovery rate was 43% in fiscal 2003, 45% in fiscal 2002 and 48% in fiscal 2001. The recovery rate represents the average percentage of the outstanding principal balance CarMax receives when a vehicle is repossessed and liquidated.

If the managed receivables do not perform in accordance with the assumptions used in determining the fair value of the gain receivable, earnings could be impacted. Despite the current weak economic environment, the managed receivables continue to perform in line with our expectations. In the fourth quarter, we adjusted both loss and prepayment assumptions for certain pools of receivables. The changes were substantially offsetting resulting in no material impact on earnings or the fair value of retained interests. Detail concerning the assumptions used to value the retained interests and the valuation’s sensitivity to adverse changes in the performance of the managed receivables are included in Note 12 to the company’s consolidated financial statements.

Selling, General and Administrative Expenses

The selling, general and administrative expense ratio was 9.9% of sales in fiscal 2003, 9.5% in fiscal 2002 and 10.8% in fiscal 2001. Excluding separation costs of $7.8 million in fiscal 2003 and $0.4 million in fiscal 2002, the selling, general and administrative expense ratios would have been 9.7% and 9.5%, respectively. The increase in the expense ratio in fiscal 2003 was caused primarily by both geographic growth and the incremental increase in expenses caused by diseconomies of scale resulting from the separation from Circuit City Stores. Growth related costs include increasing the size of the management bench for store expansion and preopening expenses for stores opening during fiscal 2004 and the first quarter of fiscal 2005. Other growth related costs such as training, recruiting and employee relocation for new stores also moderate expense leverage. We experienced approximately $9 million of expenses caused by the diseconomies of scale associated with being a stand-alone company during the last five months of fiscal 2003. Approximately half of the incremental expenses relate to employee medical benefits and workers’ compensation, including benefits administration. Other larger incremental expenses relate to insurance, such as directors’ and officers’ liability; necessary incremental staff, such as legal and treasury; and expenses related to independent company activity, such as the New York Stock Exchange listing, Securities and Exchange Commission filings and the cost of a board of directors. The increase in the expense ratio during fiscal 2003 was offset in part by comparable store sales growth, improved operational effectiveness and expense management.

The improvement in the fiscal 2002 expense ratio reflects significant expense leverage generated by strong comparable store sales growth and continued expense management, particularly of non-store expenses, the benefit of which more than offset higher second half expenses related to renewed geographic expansion.

Interest Expense

Interest expense was 0.1% of total sales in fiscal years 2003 and 2002 and 0.4% in fiscal 2001. Interest expense is primarily incurred on debt used to fund new store growth and working capital, including inventory. The fiscal 2002 decline in the interest expense ratio reflects a reduction in debt levels and lower interest rates. Refer to the “Financing Activities” section for further information on changes in debt.

Earnings before Income Taxes

Earnings before income taxes were $156.7 million in fiscal 2003, compared with $146.5 million in fiscal 2002 and $73.5 million in fiscal 2001. Excluding the non-tax-deductible, separation expenses of $7.8 million in fiscal 2003 and $0.4 million in fiscal 2002, earnings before income taxes would have been $164.5 million in fiscal 2003 and $146.9 million in fiscal 2002. Excluding the write-off of goodwill of $8.7 million in fiscal 2001, earnings before income taxes would have been $82.2 million.

Income Taxes

Based on the non-deductibility of the separation expenses, the effective income tax rate increased to 39.5% in fiscal 2003 from 38.0% in fiscal 2002 and 2001.

Selected Quarterly Financial Data (Unaudited)

	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Fiscal Year
	2003		2002		2003		2002		2003		2002		2003		2002		2003		2002
	(Amounts in thousands except per share data)
Net sales and operating revenues	$	1,005,803	$	882,825	$	1,080,682	$	943,122	$	936,819	$	852,670	$	946,640	$	855,142	$	3,969,944	$	3,533,759
Gross profit	$	122,142	$	107,785	$	128,812	$	112,738	$	106,940	$	94,889	$	110,345	$	103,981	$	468,239	$	419,393
CarMax Auto Finance income	$	19,838	$	15,685	$	22,110	$	18,555	$	19,220	$	18,027	$	21,231	$	14,206	$	82,399	$	66,473

Selling, general and administrative expenses	$	93,037	$	78,060	$	97,997	$	85,029	$	101,810	$	83,117	$	99,573	$	88,258	$	392,417	$	334,464
Separation costs	$	1,871	$	—	$	1,265	$	—	$	4,479	$	—	$	153	$	426	$	7,768	$	426
Selling, general and administrative expenses excluding separation costs	$	91,166	$	78,060	$	96,732	$	85,029	$	97,331	$	83,117	$	99,420	$	87,832	$	384,649	$	334,038
Net earnings	$	29,238	$	26,572	$	31,714	$	27,391	$	14,717	$	18,443	$	19,133	$	18,396	$	94,802	$	90,802
Net earnings excluding separation costs	$	31,109	$	26,572	$	32,979	$	27,391	$	19,196	$	18,443	$	19,286	$	18,822	$	102,570	$	91,228
Net earnings per share:
Basic	$	0.28	$	0.26	$	0.31	$	0.27	$	0.14	$	0.18	$	0.19	$	0.18	$	0.92	$	0.89
Diluted	$	0.28	$	0.26	$	0.30	$	0.26	$	0.14	$	0.18	$	0.18	$	0.18	$	0.91	$	0.87
Net earnings per share excluding separation costs:
Basic	$	0.30	$	0.26	$	0.32	$	0.27	$	0.19	$	0.18	$	0.19	$	0.18	$	1.00	$	0.89
Diluted	$	0.30	$	0.26	$	0.32	$	0.26	$	0.18	$	0.18	$	0.18	$	0.18	$	0.98	$	0.88

Net Earnings

Net earnings were $94.8 million in fiscal 2003, $90.8 million in fiscal 2002 and $45.6 million in fiscal 2001. Excluding the non-tax-deductible, separation expenses of $7.8 million in fiscal 2003 and $0.4 million in fiscal 2002, earnings would have been $102.6 million in fiscal 2003 and $91.2 million in fiscal 2002. Excluding the tax-affected write-down of goodwill of $5.4 million in fiscal 2001, net earnings would have been $51.0 million.

OPERATIONS OUTLOOK

CarMax continues to demonstrate that its consumer offer and business model can produce strong sales and earnings growth. At the beginning of fiscal 2002, CarMax announced that it would resume geographic growth. This expansion is proceeding as planned with a total of five stores opened during fiscal 2003. In addition to one standard-sized superstore originally planned in fiscal 2003 but opened in March of fiscal 2004, we plan to open approximately four standard-sized used car superstores and three prototype satellite superstores in fiscal 2004. We may also open an eighth store in the fourth quarter. In April of fiscal 2004, we sold the Jeep franchise in Kenosha, Wis. Also in fiscal 2004, we plan to sell our five Mitsubishi new car franchises. The sale of the Mitsubishi franchises, which are integrated with used car superstores, will create more space for used car sales expansion, which is more profitable for us. In addition, in Los Angeles we intend to integrate our two remaining stand-alone franchises with a used car superstore during the second half of fiscal 2004.

Comparable store used unit sales growth is a primary driver of CarMax’s profitability. We believe that our used unit comparable sales growth will be in the range of 5% to 9% in fiscal 2004 and net earnings in the range of $105 million to $116 million. This forecast assumes the continuation of the reduced approval rates from our non-prime loan providers experienced in the fourth quarter of fiscal 2003. The expense leverage that we would normally expect from the comparable store used unit growth is estimated to be more than offset by the full year of incremental costs associated with being a stand-alone company and some additional costs related to our geographic growth. We estimate the full-year effect of being a stand-alone company to be approximately $20 to $22 million, with a majority of the $11 million to $13 million incremental portion of this increase during the first seven months of fiscal 2004.

We also anticipate a reduction in yield spreads from CAF when interest rates rise above the historical lows experienced over the last two years. In the event that interest rates remain low, we would anticipate a more moderate reduction in yield spreads in order to maintain our competitive consumer offer. As the spread between the cost of funds and the retail interest rate paid by consumers ultimately returns to more normal levels, CAF’s contribution as a percent of sales is expected to decrease.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It is effective for fiscal years beginning after June 15, 2002. The company does not expect the application of the provisions of SFAS No. 143 to have an impact on its financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The company does not expect the application of the provisions of SFAS No. 146 to have an impact on its financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. It is effective for financial statements for fiscal years ending after December 15, 2002. The company has revised its disclosures to meet the requirements under this standard.

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires the recognition of a liability for certain guarantee obligations issued or modified after December 31, 2002. FIN No. 45 also clarifies disclosure requirements to be made by a guarantor of certain guarantees. The disclosure provisions of FIN No. 45 are effective for fiscal years ending after December 15, 2002. We have adopted the disclosure provisions of FIN No. 45 as of February 28, 2003. The company does not expect the adoption of FIN No. 45 to have a material impact on its financial position, results of operations or cash flows.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. The company is currently analyzing the existing guidance and reviewing any developments with regard to the proposed FASB Staff Positions issued on the implementation of FIN No. 46 which are currently subject to public comment. Therefore, the company cannot determine whether there will be an impact on its financial position, results of operations, or cash flows at this time.

In January 2003, the FASB issued EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. ” This EITF addresses the accounting by a vendor for consideration (vendor allowances) given to a customer, including a reseller of the vendor’s products, and the accounting by a reseller for cash consideration received from a vendor. It is effective for certain arrangements entered into after November 21, 2002, and for all new arrangements, including modifications to existing arrangements, entered into after December 31, 2002. The company adopted the provisions of the EITF in the fourth quarter of fiscal 2003 and, as the company’s policies were already consistent with those of EITF 02-16, the adoption of this standard did not have a material impact on the company’s financial position, results of operations or cash flows.

FINANCIAL CONDITION

Cash Provided by Operating Activities

The company generated net cash from operating activities of $72.0 million in fiscal 2003, $42.6 million in fiscal 2002 and $18.0 million in fiscal 2001. The fiscal 2003 improvement primarily resulted from an increase in net earnings and an increase in accounts payable and accrued expenses associated with the separation from Circuit City Stores. In previous years, certain liabilities such as the workers’ compensation liability were recorded through the debt from our former parent as a financing activity. The fiscal 2002 improvement primarily resulted from an increase in net earnings, partly offset by an increase in accounts receivable. The accounts receivable increase resulted from increased sales generating increased automobile loans, as well as increased yield spreads from the finance operation.

Investing Activities

Net cash used in investing activities was $80.4 million in fiscal 2003. Net cash provided by investing activities was $57.5 million in fiscal 2002 and $3.3 million in fiscal 2001. Capital expenditures were $122.0 million in fiscal 2003, $41.4 million in fiscal 2002 and $10.8 million in fiscal 2001. A majority of the capital expenditures for fiscal 2003 and fiscal 2002 were a result of our geographic expansion.

Capital expenditures have been funded primarily through sale-leaseback transactions, short- and long-term debt and internally generated funds. Net proceeds from sales of property and equipment, including sale-leasebacks totaled $41.6 million in fiscal 2003, $99.0 million in fiscal 2002 and $15.5 million in fiscal 2001. In September 2002, CarMax entered into a sale-leaseback transaction covering three superstore properties valued at approximately $37.6 million. In August 2001, CarMax entered into a sale-leaseback transaction covering nine superstores valued at approximately $102.4 million. These transactions were structured at competitive rates with initial lease terms of 15 years and two 10-year renewal options.

In fiscal 2004, we anticipate capital expenditures of approximately $200 million. Planned expenditures primarily relate to new store construction, including furniture, fixtures and equipment; land purchases; and leasehold improvements to existing properties. In addition to one standard-sized superstore originally planned in fiscal 2003 but opened in March of fiscal 2004, we expect to open seven or eight more superstores during fiscal 2004, approximately three of which will be prototype satellite superstores. We also plan in Los Angeles to co-locate our two remaining stand-alone franchises with a used car superstore.

Financing Activities

Net cash provided by financing activities was $39.8 million in fiscal 2003, compared with net cash used of $105.7 million in fiscal 2002 and $22.5 million in fiscal 2001. In May 2002, CarMax entered into a $200 million credit agreement secured by vehicle inventory. During the fourth quarter of fiscal year 2003, the credit agreement was increased from $200 million to $300 million. The credit agreement includes a $200 million revolving loan commitment and a $100 million term loan. Short-term debt is primarily funded through the revolving credit facility. Principal is due in full at maturity with interest payable monthly at a LIBOR-based rate. The credit agreement is scheduled to terminate on May 17, 2004. The termination date of the agreement will be automatically extended one year each May 17 unless CarMax or either lender elects, prior to the extension date, not to extend the agreement. As of February 28, 2003, the amount outstanding under this credit agreement was $156.1 million. Under this agreement, CarMax must meet financial covenants relating to minimum current ratio, maximum total liabilities to tangible net worth ratio and minimum fixed charge coverage ratio. CarMax was in compliance with all such covenants at February 28, 2003.

CarMax used a portion of the proceeds from the term loan for the repayment of debt to and the payment of a one-time special dividend to Circuit City Stores of $28.4 million, as well as the payment of separation expenses, and for general corporate purposes. Refer to “Contractual Obligations” for further discussion of the special dividend payment.

In December 2001, CarMax entered into an $8.5 million secured promissory note in conjunction with the purchase of land for new store construction. This note, which was paid in August 2002, was included in short-term debt as of February 28, 2002. Prior to separation, the company repaid $77.8 million of long-term debt from Circuit City Stores. This debt was included in current installments of long-term debt. In November 1998, the company entered into a four-year, $5.0 million unsecured promissory note. The outstanding balance at February 28, 2002, was $826,000 and was included in current installments of long-term debt. The note was repaid in January 2003 using existing working capital.

The aggregate principal amount of automobile loan receivables funded through securitizations discussed in Notes 11 and 12 to the company’s consolidated financial statements totaled $1.86 billion at February 28, 2003, and $1.49 billion at February 28, 2002. During fiscal 2003, the company completed two public securitizations for $512.6 million and $500 million. At February 28, 2003, the unused capacity of the warehouse facility was $276 million. Note 2(C) to the company’s consolidated financial statements includes a discussion regarding the warehouse facility. The warehouse facility program matures in June 2003. The company anticipates that it will be able to expand or enter into new securitization arrangements to meet the future needs of the automobile loan finance operation.

The company expects that proceeds from the credit agreement secured by vehicle inventory, sale-leaseback transactions, new securitization arrangements and cash generated by operations will be sufficient to fund capital expenditures and working capital requirements for the foreseeable future.

Off-Balance Sheet Arrangements

CarMax Auto Finance is the company’s finance operation. CAF’s lending business is limited to providing prime auto loans for CarMax’s used and new car sales. The company uses a securitization program to fund substantially all of the automobile loan receivables originated by CAF. The company sells the automobile loan receivables to a wholly owned, bankruptcy-remote, qualified special purpose entity that transfers an undivided interest in the receivables to a group of third-party investors. This program is referred to as the warehouse facility.

The company periodically uses public securitizations to refinance the receivables previously securitized through the warehouse facility to free up capacity in the warehouse facility. In a public securitization, a pool of automobile loan receivables are sold to a bankruptcy-remote, qualified special purpose entity that in turn transfers the receivables to a special purpose securitization trust.

Additional information regarding the nature, business purpose and importance of our off-balance sheet arrangement to our liquidity and capital resources can be found in the CarMax Auto Finance Income, Financial Condition, and Market Risk sections of this Management’s Discussion and Analysis, as well as in Notes 11 and 12 to the company’s consolidated financial statements.

CONTRACTUAL OBLIGATIONS

	Total		1 Year		2 to 3 Years		4 to 5 Years		After 5 Years
	(Amounts in millions)
Contractual obligations:
Long-term debt	$	100.0	$	—	$	100.0	$	—	$	—
Operating leases		745.8		48.2		95.7		92.3		509.6
Lines of credit		56.1		56.1		—		—		—

Total	$	901.9	$	104.3	$	195.7	$	92.3	$	509.6

CarMax currently operates 23 of its sales locations pursuant to various leases under which Circuit City Stores was the original tenant and primary obligor. Circuit City Stores and not CarMax had originally entered into these leases so that CarMax could take advantage of the favorable economic terms available to Circuit City Stores as a large retailer. Circuit City Stores has assigned each of these leases to CarMax. Despite the assignment and pursuant to the terms of the leases, Circuit City Stores remains contingently liable under the leases. In recognition of this ongoing contingent liability, CarMax made a one-time special dividend payment of $28.4 million to Circuit City Stores on October 1, 2002, the separation date.

CAPITAL STRUCTURE

During fiscal 2003, stockholders’ equity increased 14% to $554.6 million from $485.5 million in fiscal 2002. Capitalization for the past three years is illustrated in the “Capitalization” table below. The return on equity was 18.2% in fiscal 2003, compared with 20.7% in fiscal 2002. Excluding separation costs of $7.8 million in fiscal 2003 and $0.4 million in fiscal 2002, the return on equity in fiscal 2003 was 19.7% and 20.8% in fiscal 2002.

Capitalization

Fiscal	2003				2002				2001
	(Dollar amounts in millions)
Long-term debt, excluding current installments	$	100.0	15	%	$	—	0	%	$	83.1	17	%
Other long-term liabilities		14.9	2			11.4	2			10.5	2
Total stockholders’ equity		554.6	83			485.5	98			391.5	81

Total capitalization	$	669.5	100	%	$	496.8	100	%	$	485.1	100	%

MARKET RISK

Automobile Installment Loan Receivables

At February 28, 2003, and February 28, 2002, all loans in the portfolio of automobile loan receivables were fixed-rate installment loans. Financing for these automobile loan receivables is achieved through asset securitization programs that, in turn, issue both fixed- and floating-rate securities. Interest rate exposure relating to floating-rate securitizations is managed through the use of interest rate swaps. Receivables held for investment or sale are financed with working capital. Generally, changes in interest rates associated with underlying swaps will not have a material impact on earnings. However, changes in interest rates associated with underlying swaps may have a material impact on cash and cash flows.

Credit risk is the exposure to nonperformance of another party to an agreement. Credit risk is mitigated by dealing with highly rated bank counterparties. The market and credit risks associated with financial derivatives are similar to those relating to other types of financial instruments. Refer to Note 13 to the company’s consolidated financial statements for a description of these items.

The total principal amount of ending managed receivables as of February 28, 2003, and February 28, 2002, was as follows:

	2003		2002
	(Amounts in millions)
Fixed-rate securitizations	$	1,385.1	$	1,075.4
Floating-rate securitizations synthetically altered to fixed		473.2		413.3
Floating-rate securitizations		0.8		0.7
Held for investment(1)		16.0		11.8
Held for sale(2)		3.6		2.1

Total	$	1,878.7	$	1,503.3

(1)

The majority is held by a bankruptcy-remote, qualified special purpose entity.

(2)

Held by a bankruptcy-remote, qualified special purpose entity.

Interest Rate Exposure

The company also has interest rate risk from changing interest rates related to our outstanding debt. Substantially all of the debt is floating-rate debt based on LIBOR. A 100-basis point increase in market interest rates would not have had a material effect on our fiscal 2003 results of operations or cash flows.

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

The provisions of the Private Securities Litigation Reform Act of 1995 provide companies with a “safe harbor” when making forward-looking statements. This “safe harbor” encourages companies to provide prospective information about their companies without fear of litigation. The company wishes to take advantage of the “safe harbor” provisions of the Act. Company statements that are not historical facts, including statements about management’s expectations for fiscal 2004 and beyond, are forward-looking statements and involve various risks and uncertainties.

Forward-looking statements are estimates and projections reflecting our judgment and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect. Investors are cautioned not to place undue reliance on any forward-looking statements, which are based on current expectations. Important factors that could cause actual results to differ materially from estimates or projections contained in our forward-looking statements include:

•

In the normal course of business, we are subject to changes in general U.S. or regional U.S. economic conditions including, but not limited to, consumer credit availability, consumer credit delinquency and default rates, interest rates, inflation, personal discretionary spending levels and consumer sentiment about the economy in general. Any significant changes in economic conditions could adversely affect consumer demand and increase costs resulting in lower profitability for the company.

•

The company operates in a highly competitive industry and new entrants to the industry could result in increased wholesale costs for used vehicles and lower-than-expected vehicle sales and margins.

•

Any significant changes in retail prices for used and new vehicles could result in lower sales and margins for the company.

•

A reduction in the availability or access to sources of inventory would adversely affect the company’s business.

•

Should excess inventory develop, the inability to liquidate excess inventory at prices that allow the company to meet its margin targets or to recover its costs would adversely affect the company’s profitability.

•

The ability to attract and retain an effective management team in a dynamic environment and the availability of a suitable work force is vital to the company’s ability to manage and support its service-driven operating strategies. The inability to attract such a workforce team or a significant increase in payroll market costs would adversely affect the company’s profitability.

•

Changes in the availability or cost of capital and working capital financing, including the availability of long-term financing to support development of the company and the availability of securitization financing, could adversely affect the company’s growth and operating strategies.

•

A decrease in the availability of appropriate real estate locations for expansion would limit the expansion of the company’s store base and the company’s future operating results.

•

The imposition of new restrictions or regulations regarding the sale of products and/or services that the company sells, changes in tax or environmental rules and regulations applicable to the company or our competitors, or any failure to comply with such laws or any adverse change in such laws could increase costs and affect the company’s profitability.

•

We are subject to various litigation matters, which, if the outcomes in any significant matters are adverse, could negatively affect the company’s business.

COMMON STOCK

CarMax, Inc. common stock is traded on the New York Stock Exchange under the symbol “KMX.” Prior to the separation from Circuit City Stores on October 1, 2002, the Circuit City Stores, Inc.-CarMax Group Common Stock was traded on the New York Stock Exchange under the same symbol. No dividend data is shown since the company pays no dividends at this time.

	Market Price of Common Stock
Fiscal	2003				2002
Quarter	HIGH		LOW		HIGH		LOW
1st	$	34.00	$	24.75	$	15.49	$	4.70
2nd	$	26.75	$	13.00	$	20.50	$	11.50
3rd	$	21.45	$	12.90	$	21.00	$	9.20
4th	$	20.47	$	12.94	$	29.02	$	19.35

CONSOLIDATED STATEMENTS OF EARNINGS

	Years Ended February 28
	2003		%(1)	2002		%(1)	2001		%(1)
	(Amounts in thousands except per share data)
SALES AND OPERATING REVENUES:

Used vehicle sales	$	2,912,082	73.4	$	2,497,150	70.7	$	1,928,391	69.9
New vehicle sales		519,835	13.1		559,943	15.8		456,909	16.6
Wholesale vehicle sales		366,589	9.2		325,552	9.2		253,487	9.2
Other sales and revenues		171,438	4.3		151,114	4.3		119,725	4.3

NET SALES AND OPERATING REVENUES		3,969,944	100.0		3,533,759	100.0		2,758,512	100.0

Cost of sales		3,501,705	88.2		3,114,366	88.1		2,417,291	87.6

GROSS PROFIT		468,239	11.8		419,393	11.9		341,221	12.4

CARMAX AUTO FINANCE INCOME (NOTES 11 and 12)		82,399	2.1		66,473	1.9		42,738	1.5

Selling, general and administrative expenses (NOTE 10)		392,417	9.9		334,464	9.5		298,782	10.8
Interest expense (NOTE 4)		2,261	0.1		4,958	0.1		12,110	0.4
Interest income		737	—		12	—		415	—

Earnings before income taxes		156,697	3.9		146,456	4.1		73,482	2.7
Provision for income taxes (NOTE 5)		61,895	1.6		55,654	1.6		27,918	1.0

NET EARNINGS	$	94,802	2.4	$	90,802	2.6	$	45,564	1.7

Weighted average common shares (NOTE 7):

Basic		102,983			102,039			100,994
Diluted		104,570			104,022			102,420

NET EARNINGS PER SHARE (NOTE 7):

Basic	$	0.92		$	0.89		$	0.45
Diluted	$	0.91		$	0.87		$	0.44

(1)

Percents of net sales and operating revenues may not total due to rounding.

See accompanying notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEETS

	At February 28
	2003		2002
	(Amounts in thousands except share data)
ASSETS

CURRENT ASSETS:

Cash and cash equivalents (NOTE 2)	$	34,615	$	3,286
Accounts receivable, net		56,449		50,441
Automobile loan receivables held for sale (NOTE 12)		3,579		2,144
Retained interests in securitized receivables (NOTE 12)		135,016		120,683
Inventory		466,450		399,084
Prepaid expenses and other current assets		12,636		2,065

TOTAL CURRENT ASSETS		708,745		577,703

Property and equipment, net (NOTE 3)		187,158		120,976
Other assets		21,714		21,543

TOTAL ASSETS	$	917,617	$	720,222

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable	$	117,587	$	87,160
Accrued expenses and other current liabilities		44,682		25,775
Deferred income taxes (NOTE 5)		29,783		22,009
Short-term debt (NOTE 4)		56,051		9,840
Current installments of long-term debt (NOTE 4)		—		78,608

TOTAL CURRENT LIABILITIES		248,103		223,392

Long-term debt, excluding current installments (NOTE 4)		100,000		—
Deferred revenue and other liabilities		10,904		8,416
Deferred income taxes (NOTE 5)		4,041		2,935

TOTAL LIABILITIES		363,048		234,743

STOCKHOLDERS’ EQUITY (NOTES 1 AND 6):

Common stock, $0.50 par value; 350,000,000 shares authorized; 103,083,047 shares issued and outstanding at February 28, 2003		51,542		—
Capital in excess of par value		472,745		—
Retained earnings		30,282		—
Parent’s equity		—		485,479

TOTAL STOCKHOLDERS’ EQUITY		554,569		485,479

Commitments and contingent liabilities (NOTES 1, 4, 8, 9 AND 14)		—		—

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	917,617	$	720,222

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended February 28
	2003			2002			2001
	(Amounts in thousands)
OPERATING ACTIVITIES:

Net earnings	$	94,802		$	90,802		$	45,564
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		14,873			16,340			18,116
Amortization of restricted stock awards		77			100			154
Write-down of goodwill		—			—			8,677
Loss on disposition of property and equipment		30			—			415
Provision for deferred income taxes		8,880			3,162			8,758
Changes in operating assets and liabilities, net of effects from business acquisitions:
(Increase) decrease in accounts receivable, net		(6,008	)		7,232			(11,845	)
(Increase) decrease in automobile loan receivables held for sale		(1,435	)		704			19,061
Increase in retained interests in securitized receivables		(14,333	)		(46,542	)		(12,625	)
Increase in inventory		(67,366	)		(51,947	)		(62,745	)
(Increase) decrease in prepaid expenses and other current assets		(10,571	)		241			538
(Increase) decrease in other assets		(845	)		1,639			424
Increase in accounts payable, accrued expenses and other current liabilities		51,375			19,330			3,881
Increase (decrease) in deferred revenue and other liabilities		2,488			1,580			(413	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		71,967			42,641			17,960

INVESTING ACTIVITIES:

Cash used in business acquisitions		—			—			(1,325	)
Purchases of property and equipment		(122,032	)		(41,417	)		(10,834	)
Proceeds from sales of property and equipment		41,621			98,965			15,506

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(80,411	)		57,548			3,347

FINANCING ACTIVITIES:

Increase (decrease) in short-term debt, net		46,211			8,853			(565	)
Issuance of long-term debt		100,000			—			—
Payments on long-term debt		(78,608	)		(112,600	)		(21,658	)
Equity issuances, net		570			(1,958	)		(263	)
Dividends paid		(28,400	)		—			—

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		39,773			(105,705	)		(22,486	)

Increase (decrease) in cash and cash equivalents		31,329			(5,516	)		(1,179	)
Cash and cash equivalents at beginning of year		3,286			8,802			9,981

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	34,615		$	3,286		$	8,802

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for:
Interest	$	3,862		$	5,336		$	11,885
Income taxes	$	49,215		$	42,332		$	17,551

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Shares Outstanding	Common Stock		Capital in Excess of Par Value			Retained Earnings		Parent’s Equity			Total
	(Amounts in thousands)
BALANCE AT MARCH 1, 2000	—	$	—	$	—		$	—	$	344,989		$	344,989
Net earnings	—		—		—			—		45,564			45,564
Equity issuances, net	—		—		—			—		950			950

BALANCE AT FEBRUARY 28, 2001	—		—		—			—		391,503			391,503
Net earnings	—		—		—			—		90,802			90,802
Equity issuances, net	—		—		—			—		3,174			3,174

BALANCE AT FEBRUARY 28, 2002	—		—		—			—		485,479			485,479
Net earnings	—		—		—			30,282		64,520			94,802
Equity issuances, net	—		—		—			—		2,589			2,589
Special dividend	—		—		—			—		(28,400	)		(28,400	)
Recapitalization due to separation	103,014		51,507		472,681			—		(524,188	)		—
Exercise of common stock options	39		20		177			—		—			197
Shares purchased for employee stock purchase plan	—		—		(213	)		—		—			(213	)
Shares issued under stock incentive plans	30		15		408			—		—			423
Tax benefit from stock issued	—		—		12			—		—			12
Unearned compensation–restricted stock	—		—		(320	)		—		—			(320	)

BALANCE AT FEBRUARY 28, 2003	103,083	$	51,542	$	472,745		$	30,282	$	—		$	554,569

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 BACKGROUND AND BASIS OF PRESENTATION

CarMax, Inc. and its wholly owned subsidiaries (“CarMax,” “CarMax, Inc.” and “the company”) is the leading specialty retailer of used cars and light trucks in the United States. Circuit City Stores, Inc. (“Circuit City Stores” or “former parent”) established the CarMax used vehicle business in 1993 to revolutionize the highly fragmented used vehicle retail market. CarMax was the first used vehicle retailer to offer a large selection of quality used vehicles at low, “no-haggle” prices using a customer-friendly sales process in an attractive, modern sales facility. CarMax also sells new vehicles under franchise agreements with DaimlerChrysler, Mitsubishi, Nissan, Toyota, Ford and General Motors. CarMax provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation, CarMax Auto Finance (“CAF”), and third-party lenders, the sale of extended warranties and vehicle repair service.

On September 10, 2002, Circuit City Stores shareholders, which included Circuit City Stores, Inc.-Circuit City Group Common Stock shareholders and Circuit City Stores, Inc.-CarMax Group Common Stock shareholders, approved the separation of the CarMax business from Circuit City Stores, and the Circuit City Stores board of directors authorized the redemption of the CarMax Group Common Stock and the distribution of CarMax, Inc. common stock to effect the separation. The separation was effective October 1, 2002. Each outstanding share of CarMax Group Common Stock was redeemed in exchange for one share of new CarMax, Inc. common stock. In addition, each holder of Circuit City Group Common Stock received, as a tax-free distribution, a 0.313879 share of CarMax, Inc. common stock for each share of Circuit City Group Common Stock owned as of September 16, 2002, the record date of the distribution. As a result of the separation, all of the businesses, assets and liabilities of the CarMax Group are now held in CarMax, Inc., an independent, separately traded public company. These consolidated financial statements are presented as if CarMax existed as an entity separate from the other businesses of Circuit City Stores during the periods presented.

Circuit City Stores contributed to CarMax all of the subsidiaries and net assets and liabilities that constituted the CarMax Group. CarMax includes the same businesses, assets and liabilities whose financial performance was intended to be reflected by the CarMax Group Common Stock. CarMax’s assets and liabilities are accounted for at the historical values carried by Circuit City Stores prior to the separation.

In conjunction with the separation, all outstanding CarMax Group stock options and restricted stock were replaced with CarMax, Inc. stock options and restricted stock with the same terms and conditions, exercise prices and restrictions as the CarMax Group stock options and restricted stock they replaced.

The current relationship between Circuit City Stores and CarMax is governed by a transition services agreement, under which Circuit City Stores provides CarMax certain services including human resources, payroll, benefits administration, tax services, computer center support and telecommunications services. These services have terms ranging from six to 24 months, with varying renewal options. A tax allocation agreement, which generally provides that pre-separation taxes attributable to the business of each party will be borne solely by that party, was also executed upon separation.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) Principles of Consolidation

The consolidated financial statements include the accounts of CarMax and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(B) Cash and Cash Equivalents

Cash equivalents of $29.6 million at February 28, 2003, consist of highly liquid debt securities with original maturities of three months or less. Included in cash equivalents at February 28, 2003, is a restricted cash deposit of $11.5 million associated with certain insurance deductibles. There were no cash equivalents at February 28, 2002.

(C) Securitizations

The company uses a securitization program to fund substantially all of the automobile loan receivables originated by CAF. The company sells the automobile loan receivables to a wholly owned, bankruptcy-remote, qualified special purpose entity that transfers an undivided interest in the receivables to a group of third-party investors. This program is referred to as the warehouse facility.

The transfers of receivables are accounted for as sales in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The company retains various interests in the automobile loan receivables that it securitizes. The retained interests, presented on the company’s consolidated balance sheets, include the present value of the expected residual cash flows generated by the securitized receivables, the restricted cash on deposit in various reserve accounts and an

undivided ownership interest in the receivables securitized through the warehouse facility. Retained interests are carried at fair value and changes in fair value are included in earnings. See Notes 11 and 12 for additional discussion on securitizations.

(D) Fair Value of Financial Instruments

The carrying value of the company’s cash and cash equivalents, receivables including automobile loan receivables, accounts payable, short-term borrowings and long-term debt approximates fair value. The company’s retained interests in securitized receivables and derivative financial instruments are recorded on the consolidated balance sheets at fair value.

(E) Trade Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts, include certain amounts due from finance companies and customers, as well as from manufacturers for incentives and warranty reimbursements, and for other miscellaneous receivables. The estimate for doubtful accounts is based on historical experience and trends.

(F) Inventory

Inventory is comprised primarily of vehicles held for sale or for reconditioning and is stated at the lower of cost or market. Vehicle inventory cost is determined by specific identification. Parts and labor used to recondition vehicles, as well as transportation and other incremental expenses associated with acquiring and reconditioning vehicles, are included in inventory. Certain manufacturer incentives and rebates for new car inventory, including holdbacks, are recognized as a reduction to new car inventory when CarMax purchases the vehicles. Volume-based incentives are recognized as a reduction to new car inventory cost when achievement of volume thresholds are determined to be probable.

(G) Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful lives.

(H) Computer Software Costs

External direct costs of materials and services used in the development of internal-use software and payroll and payroll-related costs for employees directly involved in the development of internal-use software are capitalized. Amounts capitalized are amortized on a straight-line basis over a period of five years.

(I) Goodwill and Intangible Assets

Effective March 1, 2002, the company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which establishes accounting and reporting standards for intangible assets and goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but rather tested for impairment at least annually. The company performed the required transition impairment tests of goodwill and other intangible assets as of March 1, 2002, and determined that no impairment existed. Additionally, as of February 28, 2003, no impairment of goodwill or intangible assets resulted from the annual impairment test. Prior to March 1, 2002, goodwill was amortized on a straight-line basis over 15 years. The carrying amount of goodwill was $19.7 million as of February 28, 2003, and $20.1 million as of February 28, 2002.

(J) Defined Benefit Plan and Insurance Liabilities

Defined benefit retirement plan obligations and insurance liabilities are included in accrued expenses and other current liabilities on the company’s consolidated balance sheets. The defined benefit retirement plan obligations are determined by independent actuaries using a number of assumptions provided by the company. Key assumptions in measuring the plan obligations include the discount rate, the rate of salary increases and the estimated future return on plan assets. Insurance liability estimates for workers’ compensation, general liability and employee-related health care benefits are determined by considering historical claims experience, demographic factors and other actuarial assumptions.

(K) Impairment or Disposal of Long-Lived Assets

The company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Impairment is recognized when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value.

(L) Store Opening Expenses

Costs relating to store openings, including preopening costs, are expensed as incurred.

(M) Income Taxes

Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. A deferred tax asset is recognized if it is more likely than not that a benefit will be realized.

(N) Revenue Recognition

The company recognizes revenue when the earnings process is complete, generally either at the time of sale to a customer or upon delivery to a customer. As part of its customer service strategy, the company guarantees the vehicles it sells with a five-day or 250-mile money-back guarantee. If a customer returns the vehicle purchased within the limits of the guarantee, the company will refund the customer’s money. A reserve for returns is recorded based on historical experience and trends.

The company sells extended warranties on behalf of unrelated third parties. These warranties have terms of coverage from 12 to 72 months. Because these third parties are the primary obligors under these warranties, commission revenue is recognized at the time of sale, net of a provision for estimated customer returns of the warranties. The estimates for returns are based on historical experience and trends.

(O) Advertising Expenses

All advertising costs are expensed as incurred.

(P) Net Earnings Per Share

Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted net earnings per share is computed by dividing net earnings by the sum of the weighted average number of shares of common stock outstanding and dilutive potential common stock.

(Q) Stock-Based Compensation

The company accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense would be recorded on the date of grant and amortized over the period of service only if the current market value of the underlying stock exceeded the exercise price. No stock-based employee compensation cost is reflected in net earnings, as options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of SFAS No. 123.” The company adopted the disclosure provisions of SFAS 148 in the fourth quarter of fiscal 2003. The following table illustrates the effect on net earnings per share as if the fair value method of accounting had been applied to all outstanding stock awards in each reported period as follows:

	Years Ended February 28
	2003		2002		2001
	(Amounts in thousands)
Net earnings, as reported	$	94,802	$	90,802	$	45,564
Total stock-based compensation expenses determined under fair value based method for all awards, net of related tax effects		4,391		1,559		979

Pro forma net earnings	$	90,411	$	89,243	$	44,585

Earnings per share:
Basic, as reported	$	0.92	$	0.89	$	0.45
Basic, pro forma	$	0.88	$	0.87	$	0.44

Diluted, as reported	$	0.91	$	0.87	$	0.44
Diluted, pro forma	$	0.86	$	0.86	$	0.44

The pro forma effect on fiscal year 2003 may not be representative of the pro forma effects on net earnings for future years.

For the purpose of computing the pro forma amounts indicated above, the fair value of each option on the date of grant was estimated using the Black-Scholes option-pricing model. The weighted average assumptions used in the model are as follows:

Fiscal	2003		2002		2001
Expected dividend yield	—		—		—
Expected stock volatility	76	%	79	%	71	%
Risk-free interest rates	4	%	5	%	7	%
Expected lives (in years)	5		4		4

Using these assumptions in the Black-Scholes model, the weighted average fair value of options granted was $17 per share in fiscal 2003, $3 per share in fiscal 2002 and $1 per share in fiscal 2001.

(R) Derivative Financial Instruments

In connection with securitization activities through the warehouse facility, the company enters into interest rate swap agreements to manage exposure to interest rates and to more closely match funding costs to the use of funding. The company recognizes the interest rate swaps as either assets or liabilities on the consolidated balance sheets at fair value with changes in fair value included in earnings.

(S) Risks and Uncertainties

CarMax retails used and new cars. The diversity of CarMax’s customers and suppliers reduces the risk that a severe impact will occur in the near term as a result of changes in its customer base, competition or sources of supply. However, because of CarMax’s limited overall size, management cannot assure that unanticipated events will not have a negative impact on the company.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

(T) Reclassifications

Certain prior year amounts have been reclassified to conform to the current presentation. Wholesale sales were reclassified and reported in net sales and operating revenues. Previously, wholesale sales were recorded as a reduction to cost of sales. The reclassification of wholesale sales to sales increased sales and cost of sales by $325.6 million in fiscal 2002 and $253.5 in fiscal 2001. An additional reclassification between sales and cost of sales made to conform to the current presentation decreased sales and cost of sales by $9.1 million in fiscal 2002 and $7.4 million in fiscal 2001. Third-party finance fees were reclassified and reported in net sales and operating revenues. Previously, third-party finance fees were recorded as a reduction to selling, general and administrative expenses. The reclassification of third-party finance fees increased sales and selling, general and administrative expenses by $15.7 million in fiscal 2002 and $11.5 million in fiscal 2001. Additionally, the company presents CarMax Auto Finance income separately in the consolidated statements of earnings. Previously, CarMax Auto Finance income was recorded as a reduction to selling, general and administrative expenses. The reclassification of CarMax Auto Finance income increased selling, general and administrative expenses by $66.5 million in fiscal 2002 and $42.7 million in fiscal 2001. These reclassifications had no impact on the company’s net earnings.

3 PROPERTY AND EQUIPMENT

Property and equipment, at cost, is summarized as follows:

	As of February 28
	2003		2002
	(Amounts in thousands)
Buildings (25 years)	$	18,381	$	—
Land		19,418		3,442
Land held for sale		3,354		8,762
Land held for development		8,021		8,021
Construction in progress		91,938		64,122
Furniture, fixtures and equipment (5 to 8 years)		86,129		69,435
Leasehold improvements (8 to 15 years)		21,029		17,281

		248,270		171,063
Less accumulated depreciation and amortization		61,112		50,087

Property and equipment, net	$	187,158	$	120,976

Land held for development represents land owned for future sites that are scheduled to open more than one year beyond the fiscal year reported.

4 DEBT

Total debt is summarized as follows:

	As of February 28
	2003		2002
	(Amounts in thousands)
Term loan	$	100,000	$	—
Revolving loan		56,051		—
Debt from former parent, long-term		—		78,608
Debt from former parent, short-term		—		9,840

Total debt		156,051		88,448
Less current installments of long-term debt		—		78,608
Less short-term debt		56,051		9,840

Total long-term debt, excluding current installments	$	100,000	$	—

In May 2002, CarMax entered into a $200 million credit agreement secured by vehicle inventory. During the fourth quarter of fiscal year 2003, the credit agreement was increased from $200 million to $300 million. The credit agreement includes a $200 million revolving loan commitment and a $100 million term loan. Principal is due in full at maturity with interest payable monthly at a LIBOR-based rate. The credit agreement is scheduled to terminate on May 17, 2004. The termination date of the agreement will be automatically extended one year each May 17 unless either CarMax or either lender elects, prior to the extension date, not to extend the agreement. As of February 28, 2003, the amount outstanding under this credit agreement was $156.1 million. Under this agreement, CarMax must meet financial covenants relating to minimum current ratio, maximum total liabilities to tangible net worth ratio and minimum fixed charge coverage ratio. CarMax was in compliance with all such covenants at February 28, 2003.

At February 28, 2002, CarMax’s share of certain former-parent, long-term debt totaled $77.8 million and was included in current installments of long-term debt. At February 28, 2002, the variable interest rate on this portion of debt was 2.25%. Additionally, CarMax’s portion of certain former-parent, short-term debt totaled $1.4 million at February 28, 2002, and was included in short-term debt. As part of the separation in fiscal 2003, CarMax’s portion of this debt was paid in full.

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

In November 1998, CarMax entered into a four-year, $5 million unsecured promissory note. A portion of the principal amount was due annually with interest payable periodically at 8.25%. The outstanding balance at February 28, 2002, was $826,000 and was included in current installments of long-term debt. The note was repaid in January 2003 using existing working capital.

The weighted average interest rate on the outstanding short-term debt was 3.2% during fiscal 2003, 4.4% during fiscal 2002 and 6.8% during fiscal 2001.

The company capitalizes interest in connection with the construction of certain facilities. Capitalized interest totaled $956,000 in fiscal 2003 and $530,000 in fiscal 2002. No interest was capitalized in fiscal 2001.

5 INCOME TAXES

The components of the provision for income taxes on net earnings are as follows:

	Years Ended February 28
	2003		2002		2001
	(Amounts in thousands)
Current:
Federal	$	47,600	$	47,389	$	16,986
State		5,415		5,103		2,174

		53,015		52,492		19,160

Deferred:
Federal		8,614		3,067		8,494
State		266		95		264

		8,880		3,162		8,758

Provision for income taxes	$	61,895	$	55,654	$	27,918

The effective income tax rate differed from the federal statutory income tax rate as follows:

	Years Ended February 28
	2003		2002		2001
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	3.0		3.0		3.0
Non-deductible separation costs	1.5		—		—

Effective income tax rate	39.5	%	38.0	%	38.0	%

The tax effects of temporary differences that give rise to a significant portion of the deferred tax assets and liabilities are as follows:

	As of February 28
	2003		2002
	(Amounts in thousands)
Deferred tax assets:
Accrued expenses	$	7,220	$	6,719
Other		120		187

Total gross deferred tax assets		7,340		6,906

Deferred tax liabilities:
Depreciation and amortization		5,748		3,615
Securitized receivables		29,138		22,593
Inventory		5,447		4,257
Prepaid expenses		831		1,385

Total gross deferred tax liabilities		41,164		31,850

Net deferred tax liability	$	33,824	$	24,944

Based on the company’s historical and current pretax earnings, management believes the amount of gross deferred tax assets will more likely than not be realized through future taxable income; therefore, no valuation allowance is necessary.

6 COMMON STOCK AND STOCK-BASED INCENTIVE PLANS

(A) Shareholder Rights Plan

In conjunction with the separation from Circuit City Stores, a shareholder rights plan was adopted. CarMax, Inc. shareholders received preferred stock purchase rights as a dividend at the rate of one right for each share of CarMax, Inc. common stock owned. The rights are exercisable only upon the attainment of, or the commencement of a tender offer to attain, a specified ownership interest in CarMax by a person or group. When exercisable, each CarMax right would entitle the holder to buy one one-thousandth of a share of Cumulative Participating Preferred Stock, Series A, $20 par value, at an exercise price of $140 per share, subject to adjustment. A total of 120,000 shares of such preferred stock, which have preferential dividend and liquidation rights, have been authorized and designated. No such shares are outstanding. In the event that an acquiring person or group acquires the specified ownership percentage of CarMax, Inc. common stock (except pursuant to a cash tender offer for all outstanding shares determined to be fair by the board of directors) or engages in certain transactions with CarMax after the rights become exercisable, each right will be converted into a right to purchase, for half the current market price at that time, shares of the CarMax, Inc. common stock valued at two times the exercise price. The company also has an additional 19,880,000 shares of undesignated preferred stock authorized of which no shares are outstanding.

(B) Restricted Stock

Prior to the separation, Circuit City Stores issued restricted shares of CarMax Group Common Stock to key employees of CarMax under the Circuit City Stores 1994 Stock Incentive Plan. As a result of the separation, restricted shares of CarMax Group Common Stock issued under the provisions of the Circuit City Stores stock incentive plan were exchanged for restricted shares of CarMax, Inc. common stock under the CarMax, Inc. 2002 Stock Incentive Plan. In addition, Circuit City Group restricted stock previously issued to CarMax Group employees were converted and replaced by restricted stock under the CarMax, Inc. stock incentive plans. Total restricted stock awards of 25,984 shares were exchanged in fiscal 2003. CarMax has issued restricted stock under the provisions of the plan whereby management and key employees of CarMax are granted restricted shares of CarMax, Inc. common stock. Shares are awarded in the name of the employee, who has all the rights of a shareholder, subject to certain restrictions or forfeitures. Restrictions on the awards generally expire three or four years from the date of grant.

The market value at the date of grant of all shares granted has been recorded as unearned compensation and is a component of equity. Unearned compensation is expensed over the restriction periods. The total charge to operations was $77,400 in fiscal 2003; $99,700 in fiscal 2002; and $153,500 in fiscal 2001. As of February 28, 2003, 27,275 restricted shares of CarMax, Inc. common stock were outstanding.

(C) Stock Incentive Plans

As a result of the separation, stock options issued to CarMax Group employees under the provisions of the Circuit City Stores stock incentive plan were replaced by stock options under the CarMax, Inc. stock incentive plans. In addition, Circuit City Group stock options previously issued to CarMax Group employees were converted and replaced by stock options under the CarMax, Inc. stock incentive plans. Under these plans, nonqualified stock options may be granted to management, key employees and outside directors of CarMax to purchase shares of CarMax, Inc. common stock. The exercise price for nonqualified options is equal to, or greater than, the market value at the date of grant. Options generally are exercisable over a period from one to eight years from the date of grant. CarMax has authorized 10,100,000 shares of CarMax, Inc. common stock to be issued as either options or restricted stock grants. Shares of CarMax, Inc. common stock available for issuance of options or restricted stock grants totaled 5,687,341 at February 28, 2003.

The company’s stock option activity is summarized in Table 1 below. Table 2 summarizes information about stock options outstanding as of February 28, 2003.

(D) Employee Stock Purchase Plan

The company has an employee stock purchase plan for all CarMax employees meeting certain eligibility criteria. Under the plan, eligible employees may, subject to certain limitations, purchase shares of CarMax, Inc. common stock. For each $1.00 contributed by employees under the plan, the company matches $0.15. Purchases are limited to 10% of an employee’s eligible compensation, up to a maximum of $7,500 per year. Prior to the separation, CarMax employees were authorized to purchase up to 2,000,000 shares of CarMax Group Common Stock under the plan for CarMax Group employees. Upon separation, the former Circuit City plan for CarMax Group employees was replaced by the 2002 CarMax, Inc. employee stock purchase plan, which authorized CarMax, Inc. employees to purchase up to 1,000,000 shares of CarMax, Inc. common stock. The source of the shares available for purchase by employees may, at the company’s option, be open market purchases or new issue.

TABLE 1

	2003				2002				2001
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
	(Shares in thousands)
Outstanding at beginning of year	3,631		$	4.81	4,107		$	3.16	3,324		$	3.87
Granted	1,134		$	26.22	1,659		$	4.94	1,281		$	1.70
Exercised	(285	)	$	5.06	(1,941	)	$	1.32	(56	)	$	0.22
Cancelled	(135	)	$	9.03	(194	)	$	5.95	(442	)	$	4.67

Outstanding at end of year	4,345		$	10.25	3,631		$	4.81	4,107		$	3.16

Options exercisable at end of year	1,440		$	6.08	821		$	6.85	1,943		$	2.94

TABLE 2

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
	(Shares in thousands)
$ 1.63	835	4.0	$	1.63	351	$	1.63
$ 3.22 to $ 4.89	1,500	5.0	$	4.82	344	$	4.75
$ 6.06 to $ 9.06	712	3.2	$	6.31	532	$	6.40
$ 9.19 to $ 13.25	113	2.1	$	10.70	107	$	10.56
$ 14.00 to $ 20.00	154	4.1	$	15.28	88	$	15.27
$ 22.47 to $ 43.44	1,031	6.0	$	27.03	18	$	36.66

Total	4,345	4.6	$	10.25	1,440	$	6.08

At February 28, 2003, a total of 903,509 shares remained available under the CarMax plan. Shares purchased on the open market on behalf of employees were 213,931 during fiscal 2003; 183,902 during fiscal 2002; and 477,094 during fiscal 2001. The average price per share purchased under the plans was $19.43 in fiscal 2003, $17.13 in fiscal 2002 and $4.18 in fiscal 2001. The company match totaled $520,700 in fiscal 2003; $384,800 in fiscal 2002; and $247,000 in fiscal 2001.

(E) 401(k) Plan

CarMax sponsors a 401(k) plan for all employees meeting certain eligibility criteria. Under the plan, eligible employees can contribute up to 40% of their salaries, and the company matches a portion of those associate contributions. The total expense for this plan was $1.0 million in fiscal 2003; $885,000 in fiscal 2002; and $686,000 in fiscal 2001.

7 EARNINGS PER SHARE

CarMax was a wholly owned subsidiary of Circuit City Stores during a portion of the periods presented. Earnings per share have been presented to reflect the capital structure effective with the separation of CarMax from Circuit City Stores.

All earnings per share calculations have been computed as if the separation had occurred at the beginning of the periods presented.

Reconciliations of the numerator and denominator of basic and diluted earnings per share are presented below:

	Years Ended February 28
	2003		2002		2001
	(Amounts in thousands except per share data)
Weighted average common shares		102,983		102,039		100,994
Dilutive potential common shares: Options		1,579		1,950		1,332
Restricted stock		8		33		94

Weighted average common shares and dilutive potential common shares		104,570		104,022		102,420

Net earnings available to common shareholders	$	94,802	$	90,802	$	45,564
Basic net earnings per share	$	0.92	$	0.89	$	0.45
Diluted net earnings per share	$	0.91	$	0.87	$	0.44

Certain options were outstanding and not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase 1,053,610 shares of CarMax, Inc. common stock with exercise prices ranging from $18.60 to $43.44 per share were outstanding and not included in the calculation at the end of fiscal 2003; 15,364 shares with exercise prices ranging from $37.49 to $43.44 per share at the end of fiscal 2002; and 1,382,935 shares with exercise prices ranging from $6.06 to $43.44 per share at the end of fiscal 2001.

8 PENSION PLANS

The company has a noncontributory defined benefit pension plan covering the majority of full-time employees who are at least age 21 and have completed one year of service. The cost of the program is being funded currently. Plan benefits generally are based on years of service and average compensation. The company’s contributions were $2.3 million in fiscal 2003, $1.3 million in fiscal 2002 and $1.6 million in fiscal 2001.

Prior to March 1, 2002, eligible CarMax associates participated in the consolidated Circuit City Stores pension plan. The financial status and amounts included in the consolidated balance sheets were allocated to the company from Circuit City Stores and were included in the consolidated Circuit City Stores pension plan. In anticipation of the October 1, 2002, separation from Circuit City Stores, a separate CarMax pension plan was created on March 1, 2002. As a result of separating the consolidated plan assets, certain current year adjustments to the plan assets and funded status were necessary and are reflected in the following tables. The following tables set forth the company’s pension plan’s financial status and net amounts recognized in accrued expenses and other current liabilities in the consolidated balance sheets:

	As of February 28
	2003			2002
	(Amounts in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	14,868		$	7,837
Service cost		4,021			2,549
Interest cost		1,104			588
Plan amendments		367			—
Actuarial loss		4,297			4,002
Benefits paid		(102	)		(108	)

Benefit obligation at end of year	$	24,555		$	14,868

Change in plan assets:
Fair value of plan assets at beginning of year	$	5,008		$	4,074
Actual return on plan assets		(1,095	)		(262	)
Adjustment for separation		(478	)		—
Employer contributions		2,343			1,304
Benefits paid		(102	)		(108	)

Fair value of plan assets at end of year	$	5,676		$	5,008

Reconciliation of funded status:
Funded status	$	(18,879	)	$	(9,860	)
Unrecognized actuarial loss		13,339			7,524
Adjustment for separation		(4,055	)		—
Unrecognized prior service benefit		331			(2	)

Net amount recognized	$	(9,264	)	$	(2,338	)

The components of net pension expense were as follows:

	Years Ended February 28
	2003			2002			2001
	(Amounts in thousands)
Service cost	$	4,021		$	2,549		$	1,525
Interest cost		1,104			588			355
Expected return on plan assets		(617	)		(424	)		(283	)
Amortization of prior year service cost		35			(2	)		(2	)
Amortization of transitional asset		—			(3	)		(3	)
Recognized actuarial loss		194			203			91

Net pension expense	$	4,737		$	2,911		$	1,683

Assumptions used in the accounting for the pension plan were:

	Years Ended February 28
	2003		2002		2001
Weighted average discount rate	6.50	%	7.25	%	7.50	%
Rate of increase in compensation levels	6.00	%	7.00	%	6.00	%
Expected rate of return on plan assets	9.00	%	9.00	%	9.00	%

The company also has an unfunded nonqualified plan that restores retirement benefits for certain CarMax senior executives who are affected by Internal Revenue Code limitations on benefits provided under the pension plan. The projected benefit obligation under this plan was approximately $2.0 million at February 28, 2003, and $1.6 million at February 28, 2002. The liability recognized under this plan was $1.2 million at February 28, 2003, and $0.5 million at February 28, 2002, and is included in accrued expenses and other current liabilities in the consolidated balance sheets.

9 LEASE COMMITMENTS

The company conducts a substantial portion of its business in leased premises. The company’s lease obligations are based upon contractual minimum rates. Twenty-three of CarMax’s sales locations are currently operated under leases originally entered into by Circuit City Stores. Although each of these leases has been assigned to a subsidiary of CarMax, Inc., Circuit City Stores remains contingently liable under the leases. In recognition of the ongoing contingent liability after the separation, the company made a one-time special dividend payment to Circuit City Stores of $28.4 million at separation.

Rental expense for all operating leases was $48.1 million in fiscal 2003, $41.4 million in fiscal 2002 and $36.1 million in fiscal 2001. Most leases provide that the company pay taxes, maintenance, insurance and operating expenses applicable to the premises. The initial term of most real property leases will expire within the next 20 years; however, most of the leases have options providing for renewal periods of 10 to 20 years at terms similar to the initial terms.

Future minimum fixed lease obligations, excluding taxes, insurance and other costs payable directly by the company, as of February 28, 2003, were approximately:

	Operating Lease Commitments
	(Amounts in thousands)
2004	$	48,200
2005		48,200
2006		47,500
2007		46,000
2008		46,300
After 2008		509,600

Total minimum lease payments	$	745,800

In fiscal 2003, the company entered into a sale-leaseback transaction covering three superstore properties valued at approximately $37.6 million. In fiscal 2002, the company entered into a sale-leaseback transaction covering nine superstore properties valued at approximately $102.4 million. These transactions were structured at competitive rates with initial lease terms of 15 years and two 10-year renewal options. Gains or losses on sale-leaseback transactions are deferred and amortized over the term of the leases. The company does not have continuing involvement under the sale-leaseback transactions. In conjunction with these sale-leaseback transactions, the company must meet financial covenants relating to minimum tangible net worth and minimum coverage of rent expense. The company was in compliance with all such covenants at February 28, 2003.

10 SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

(A) Advertising Expense

Advertising expense, which is included in selling, general and administrative expenses in the accompanying consolidated statements of earnings, amounted to $52.4 million (1.3% of net sales and operating revenues) in fiscal 2003, $47.3 million (1.3% of net sales and operating revenues) in fiscal 2002, and $44.9 million (1.6% of net sales and operating revenues) in fiscal 2001.

(B) Write-Down of Goodwill

In the fourth quarter of fiscal 2001, CarMax recorded $8.7 million for the write-down of goodwill associated with two underperforming stand-alone new car franchises.

11 CARMAX AUTO FINANCE INCOME

The company’s finance operation, CarMax Auto Finance, originates automobile loans to prime-rated customers at competitive market rates of interest. The company sells the majority of the loans it originates each month in a securitization transaction discussed in Note 12. The majority of the profit contribution from CAF is generated by the spread between the interest rate charged to the customer and the cost of funds. A gain results from recording a receivable equal to the present value of the expected residual cash flows generated by the securitized receivables. The cash flows are calculated taking into account expected prepayment and default rates.

CarMax Auto Finance income was as follows:

	Years Ended February 28
	2003		2002		2001
	(Amounts in millions)
Gains on sales of loans	$	68.2	$	56.4	$	35.4

Other income:
Servicing fee income		17.3		14.0		10.8
Interest income		11.5		7.7		5.2

Total other income		28.8		21.7		16.0

Direct expenses:
Payroll and fringes expense		7.0		5.7		4.2
Other direct expenses		7.6		5.9		4.5

Total direct expenses		14.6		11.6		8.7

CarMax Auto Finance income	$	82.4	$	66.5	$	42.7

CarMax Auto Finance income does not include any allocation of indirect costs or income. The company presents this information on a direct basis to avoid making arbitrary decisions regarding the indirect benefit or costs that could be attributed to CAF. Examples of indirect costs not included are retail store expenses, retail financing commissions and corporate expenses such as human resources, administrative services, marketing, information systems, accounting, legal, treasury and executive payroll.

12 SECURITIZATIONS

The company uses a securitization program to fund substantially all of the automobile loan receivables originated by CarMax Auto Finance. The company sells the automobile loan receivables to a wholly owned, bankruptcy-remote, qualified special purpose entity that transfers an undivided interest in the receivables to a group of third-party investors. The qualified special purpose entity and investors have no recourse to the company’s assets for the principal amount of the loans. The investors issue commercial paper supported by the transferred receivables, and the proceeds from the sale of the commercial paper are used to pay for the securitized receivables. This program is referred to as the warehouse facility.

The company periodically uses public securitizations to refinance the receivables previously securitized through the warehouse facility. This frees up capacity in the warehouse facility. In a public securitization, a pool of automobile loan receivables are sold to a bankruptcy-remote, qualified special purpose entity that in turn transfers the receivables to a special purpose securitization trust. The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the securities are used to pay for the securitized receivables. The earnings impact of moving receivables from the warehouse facility to a public securitization has not been and is not expected to be material to the operations of the company.

The transfers of receivables are accounted for as sales in accordance with SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” When the receivables are securitized, the company recognizes a gain or loss on the sale of the receivables as described in Note 11.

	Years Ended February 28
	2003			2002			2001
	(Amounts in millions)
Net loans originated	$	1,189.0		$	941.0		$	785.5
Loans sold	$	1,185.9		$	938.5		$	818.7
Gains on sales of loans	$	68.2		$	56.4		$	35.4
Gains on sales of loans as a percentage of loans sold		5.8	%		6.0	%		4.3	%

Retained Interests

The company retains various interests in the automobile loan receivables that it securitizes. The retained interests, presented on the company’s consolidated balance sheets, serve as a credit enhancement for the benefit of the investors in the securitized receivables. These retained interests include the present value of the expected residual cash flows generated by the securitized receivables, or “interest-only strip receivables,” the restricted cash on deposit in various reserve accounts and an undivided ownership interest in the receivables securitized through the warehouse facility, or “required excess receivables” as described below. The qualified special purpose entities and the investors have no recourse to the company’s assets beyond the retained interests. The value of the retained interests may fluctuate depending upon the performance of the securitized receivables. Retained interests balances consisted of the following:

	As of February 28
	2003		2002
	(Amounts in millions)
Interest-only strip receivables	$	88.3	$	74.3
Restricted cash		33.3		34.7
Required excess receivables		13.4		11.7

Total	$	135.0	$	120.7

The retained interests had a weighted average life of 1.6 years as of February 28, 2003, and February 28, 2002. As defined in SFAS No. 140, the weighted average life in periods (for example, months or years) of prepayable assets is calculated by summing the product (a), the sum of the principal collections expected in each future period, times (b), the number of periods until collection, and then dividing that total by (c), the initial principal balance.

Interest-only strip receivables. Interest-only strip receivables represent the present value of residual cash flows the company expects to receive over the life of the securitized receivables. The value of these receivables is determined by estimating the future cash flows using management’s projections of key factors, such as finance charge income, default rates, prepayment rates and discount rates appropriate for the type of asset and risk. The value of interest-only strip receivables may be affected by external factors, such as changes in the behavior patterns of customers, changes in the strength of the economy and developments in the interest rate markets; therefore, actual performance may differ from these projections. Management evaluates the performance of the receivables relative to these assumptions on a regular basis. Any financial impact resulting from a change in performance is recognized in earnings in the period in which it occurs.

Restricted cash. Restricted cash represents amounts on deposit in various reserve accounts established for the benefit of the securitization investors. The amounts on deposit in the reserve accounts are used to pay various amounts, including principal and interest to investors, in the event that the cash generated by the securitized receivables in a given period is insufficient to pay those amounts. In general, each of the company’s securitizations requires that an amount equal to a specified percentage of the initial receivables balance be deposited in a reserve account on the closing date and that any excess cash generated by the receivables be used to fund the reserve account to the extent necessary to maintain the required amount. If the amount on deposit in the reserve account exceeds the required amount, an amount equal to that excess is released through the qualified special purpose entity to the company. In the public securitizations, the amount required to be on deposit in the reserve account must equal or exceed a specified floor amount. The reserve account remains at the floor amount until the investors are paid in full, at which time the remaining reserve account balance is released through the qualified special purpose entity to the company. The amount required to be maintained in the public securitization reserve accounts may increase depending upon the performance of the securitized receivables. Generally, restricted cash reserves range between 2.0% and 2.5% of managed receivables.

Required excess receivables. The warehouse facility requires that the total value of the securitized receivables exceed, by a specified amount, the principal amount owed to the investors. The required excess receivables balance represents this specified amount. Any cash flows generated by the required excess receivables are used, if needed, to make payments to the investors.

Key Assumptions Used in Measuring Retained Interests and Sensitivity Analysis

The following table shows the key economic assumptions used in measuring the fair value of the retained interests at February 28, 2003, and a sensitivity analysis showing the hypothetical effect on the interest-only strip receivables if there were unfavorable variations from the assumptions used. Key economic assumptions at February 28, 2003, are not materially different from assumptions used to measure the fair value of retained interests at the time of securitization. The company has modified some of the key economic assumptions at February 28, 2003, from the initial assumptions used to measure the fair value of retained interests at the time of securitization. Increases in loss rates and decreases in prepayment speeds were substantially offsetting resulting in no material change in the value of

retained interests. These sensitivities are hypothetical and should be used with caution. In this table, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumption; in actual circumstances, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.

	Assumptions Used	Impact on Fair Value of 10% Adverse Change		Impact on Fair Value of 20% Adverse Change
	(Dollar amounts in millions)
Prepayment rate	1.45%-1.55%	$	5.3	$	10.2
Cumulative default rate	1.85%-2.40%	$	3.2	$	6.5
Annual discount rate	12.0%	$	1.7	$	3.4

Prepayment rate. The company uses the Absolute Prepayment Model or “ABS” to estimate prepayments. This model assumes a rate of prepayment each month relative to the original number of receivables in a pool of receivables. ABS further assumes that all the receivables are the same size and amortize at the same rate and that each receivable in each month of its life will either be paid as scheduled or prepaid in full. For example, in a pool of receivables originally containing 10,000 receivables, a 1% ABS rate means that 100 receivables prepay each month.

Cumulative default rate. Cumulative default rate or “static pool” net losses are calculated by dividing the total projected future credit losses of a pool of receivables by the original pool balance.

Continuing Involvement with Securitized Receivables

The company continues to manage the automobile loan receivables that it securitizes. The company receives servicing fees of approximately 1% of the outstanding principal balance of the securitized receivables. The servicing fees specified in the securitization agreements adequately compensate the company for servicing the securitized receivables. Accordingly, no servicing asset or liability has been recorded. The company is at risk for the retained interests in the securitized receivables. If the securitized receivables do not perform as originally projected, the value of the retained interests would be impacted. The assumptions used to value the retained interests, as well as a sensitivity analysis, are detailed in the “Key Assumptions Used in Measuring Retained Interests and Sensitivity Analysis” section of this footnote. Supplemental information about the managed receivables is shown in the following tables:

	Fiscal
	2003			2002			2001
	(Amounts in millions)
Loans securitized	$	1,859.1		$	1,489.4		$	1,215.4
Loans held for sale or investment		19.6			13.9			11.6

Ending managed receivables	$	1,878.7		$	1,503.3		$	1,227.0

Accounts 31+ days past due	$	27.6		$	22.3		$	18.1
Past due accounts as a percentage of ending managed receivables		1.5	%		1.5	%		1.5	%

	Fiscal
	2003			2002			2001
	(Amounts in millions)
Average managed receivables	$	1,701.0		$	1,393.7		$	1,088.9
Credit losses on managed receivables	$	17.5		$	12.9		$	7.2
Annualized losses as a percentage of average managed receivables		1.0	%		0.9	%		0.7	%

Selected Cash Flows from Securitized Receivables

The table below summarizes certain cash flows received from and paid to the automobile loan securitizations:

	Fiscal
	2003		2002
	(Amounts in millions)
• Proceeds from new securitizations	$	1,018.7	$	755.7
• Proceeds from collections reinvested in revolving period securitizations	$	468.9	$	452.3
• Servicing fees received	$	17.0	$	13.8
• Other cash flows received from retained interests:
Interest-only strip receivables	$	65.4	$	48.2
Cash reserve releases, net	$	25.3	$	15.8

Proceeds from new securitizations. Proceeds from new securitizations represent receivables newly securitized through the warehouse facility during the period. Receivables initially securitized through the warehouse facility that are periodically sold in publicly underwritten offers are not considered new securitizations for this table.

Proceeds from collections. Proceeds from collections reinvested in revolving period securitizations represent principal amounts collected on receivables securitized through the warehouse facility which are used to fund new originations.

Servicing fees. Servicing fees received represent cash fees paid to the company to service the securitized receivables.

Other cash flows received from retained interests. Other cash flows received from retained interests represent cash received by the company from securitized receivables other than servicing fees. It includes cash collected on interest-only strip receivables and amounts released to the company from restricted cash accounts.

Financial Covenants and Performance Triggers

The securitization agreements include various financial covenants and performance tests. The company must meet financial covenants relating to minimum tangible net worth, maximum total liabilities to tangible net worth ratio, minimum tangible net worth to managed assets ratio, minimum current ratio, minimum cash balance or borrowing capacity and minimum fixed charge coverage ratio. The securitized receivables must meet performance tests relating to portfolio yield, default rates and delinquency rates. If these financial covenants and/or performance tests are not met, in addition to other consequences, the company may be unable to continue to securitize receivables through the warehouse facility or be terminated as servicer under the public securitizations. The company was in compliance with these financial covenants and the securitized receivables were in compliance with these performance tests at February 28, 2003.

13 FINANCIAL DERIVATIVES

The company enters into amortizing swaps relating to automobile loan receivable securitizations to convert variable-rate financing costs to fixed-rate obligations to better match funding costs to the receivables being securitized in the warehouse facility. The company entered into one 20-month and twelve 40-month amortizing interest rate swaps with initial notional amounts totaling approximately $1.05 billion in fiscal 2003, twelve 40-month amortizing interest rate swaps with initial notional amounts totaling approximately $854.0 million in fiscal 2002 and nine 40-month amortizing interest rate swaps with initial notional amounts totaling approximately $735.0 million in fiscal 2001. The current amortized notional amount of all outstanding swaps related to the automobile loan receivable securitizations was approximately $473.2 million at February 28, 2003, and $413.3 million at February 28, 2002. The fair value of swaps included in accounts payable totaled a net liability of $2.6 million at February 28, 2003, and $841,000 at February 28, 2002.

The market and credit risks associated with interest rate swaps are similar to those relating to other types of financial instruments. Market risk is the exposure created by potential fluctuations in interest rates. The company does not anticipate significant market risk from swaps as they are used on a monthly basis to match funding costs to the use of the funding. Credit risk is the exposure to nonperformance of another party to an agreement. The company mitigates credit risk by dealing with highly rated bank counterparties.

14 CONTINGENT LIABILITIES

(A) Litigation

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

(B) Other Matters

In accordance with the terms of real estate lease agreements, the company generally agrees to indemnify the lessor from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities and repairs to leased property upon termination of the lease. Additionally, in accordance with the terms of agreements entered into for the sale of our properties, the company generally agrees to indemnify the buyer from certain liabilities and costs arising subsequent to the date of the sale, including environmental liabilities and liabilities resulting from the breach of representations or warranties made in accordance with the agreements. The company does not have any known material environmental commitments, contingencies or other indemnification issues arising from these arrangements.

As part of its customer service strategy, the company guarantees the vehicles it sells with a 30-day limited warranty guarantee. A vehicle in need of repair within 30 days of the customer’s purchase will be repaired free of charge. Because of this guarantee, each vehicle sold has an implied liability associated with it. As such, the company records a provision for repairs during the guarantee period for each vehicle sold based on historical trends. The liability for this guarantee was $1.3 million at February 28, 2003, and $1.0 million at February 28, 2002, and is included in accrued expenses and other current liabilities in the consolidated balance sheets.

15 RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It is effective for fiscal years beginning after June 15, 2002. The company does not expect the application of the provisions of SFAS No. 143 to have an impact on its financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The company does not expect the application of the provisions of SFAS No. 146 to have an impact on its financial position, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires the recognition of a liability for certain guarantee obligations issued or modified after December 31, 2002. FIN No. 45 also clarifies disclosure requirements to be made by a guarantor of certain guarantees. The disclosure provisions of FIN No. 45 are effective for fiscal years ending after December 15, 2002. We have adopted the disclosure provisions of FIN No. 45 as of February 28, 2003. The company does not expect the adoption of FIN No. 45 to have a material impact on its financial position, results of operations or cash flows.

In January 2003, the FASB issued EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” This EITF addresses the accounting by a vendor for consideration (vendor allowances) given to a customer, including a reseller of the vendor’s products, and the accounting by a reseller for cash consideration received from a vendor. It is effective for certain arrangements entered into after November 21, 2002, and for all new arrangements, including modifications to existing arrangements, entered into after December 31, 2002. The company adopted the provisions of the EITF in the fourth quarter of fiscal 2003 and, as the company’s policies were already consistent with those of EITF 02-16, the adoption of this standard did not have a material impact on the company’s financial position, results of operations or cash flows.

16 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Fiscal Year
	2003		2002		2003		2002		2003		2002		2003		2002		2003		2002
	(Amounts in thousands except per share data)
Net sales and operating revenues	$	1,005,803	$	882,825	$	1,080,682	$	943,122	$	936,819	$	852,670	$	946,640	$	855,142	$	3,969,944	$	3,533,759
Gross profit	$	122,142	$	107,785	$	128,812	$	112,738	$	106,940	$	94,889	$	110,345	$	103,981	$	468,239	$	419,393
CarMax Auto Finance income	$	19,838	$	15,685	$	22,110	$	18,555	$	19,220	$	18,027	$	21,231	$	14,206	$	82,399	$	66,473
Selling, general and administrative expenses	$	93,037	$	78,060	$	97,997	$	85,029	$	101,810	$	83,117	$	99,573	$	88,258	$	392,417	$	334,464
Net earnings	$	29,238	$	26,572	$	31,714	$	27,391	$	14,717	$	18,443	$	19,133	$	18,396	$	94,802	$	90,802
Net earnings per share:
Basic	$	0.28	$	0.26	$	0.31	$	0.27	$	0.14	$	0.18	$	0.19	$	0.18	$	0.92	$	0.89
Diluted	$	0.28	$	0.26	$	0.30	$	0.26	$	0.14	$	0.18	$	0.18	$	0.18	$	0.91	$	0.87

Certain prior year amounts have been reclassified to conform to the current presentation. Wholesale sales were reclassified and reported in net sales and operating revenues. Previously, wholesale sales were recorded as a reduction to cost of sales. This reclassification increased sales and cost of sales in the first through fourth quarters of fiscal 2002 by $84.5 million, $90.1 million, $76.7 million and $74.3 million, respectively, for an annual impact of $325.6 million. An additional reclassification between sales and cost of sales made to conform to the current presentation decreased sales and cost of sales in the first through fourth quarters of fiscal 2002 by $2.3 million, $2.5 million, $2.2 million and $2.1 million, respectively, for an annual impact of $9.1 million. Third-party finance fees were reclassified from selling, general and administrative expenses to sales. This reclassification increased sales in the first through fourth quarters of fiscal 2002 by $3.8 million, $4.2 million, $3.9 million and $3.8 million, respectively, for an annual impact of $15.7 million. Additionally, the company presents CarMax Auto Finance income separately in the consolidated statements of earnings. Previously, CarMax Auto Finance income was recorded as a reduction to selling, general and administrative expenses. This reclassification increased selling, general and administrative expenses in the first through fourth quarters of fiscal 2002 by $15.7 million, $18.6 million, $18.0 million and $14.2 million, respectively, for an annual impact of $66.5 million. These reclassifications had no impact on the company’s net earnings.

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders

CarMax, Inc.:

We have audited the accompanying consolidated balance sheets of CarMax, Inc. and subsidiaries (the “Company”) as of February 28, 2003 and 2002, and the related consolidated statements of earnings, stockholders’ equity and cash flows for each of the fiscal years in the three-year period ended February 28, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CarMax, Inc. and subsidiaries as of February 28, 2003 and 2002, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended February 28, 2003, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

RICHMOND, VIRGINIA

MARCH 31, 2003

EX-21.1 9 dex211.htm CARMAX, INC. SUBSIDIARIES CarMax, Inc. Subsidiaries

Exhibit 21.1

CARMAX, INC.

Subsidiaries of the Company

Subsidiary		Jurisdiction of Incorporation or Organization

CarMax Auto Superstores, Inc.		Virginia

CarMax Auto Superstores West Coast, Inc.		California

CFC II, Inc.		Virginia

CPD, Inc.		Virginia

Glen Allen Insurance, LTD		Bermuda

EX-23.1 10 dex231.txt CONSENT OF KPMG LLP Exhibit 23.1 Consent of Independent Auditors The Board of Directors CarMax, Inc.: We consent to incorporation by reference in the registration statement (No. 333-100311) on Form S-8 of CarMax, Inc. of our reports dated March 31, 2003, with respect to the consolidated balance sheets of CarMax, Inc. as of February 28, 2003 and 2002, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended February 28, 2003, and the related financial statement schedule, which reports are included or incorporated by reference from the annual report to stockholders, in the February 28, 2003, annual report on Form 10-K of CarMax, Inc. /s/ KPMG LLP Richmond, Virginia May 23, 2003 EX-24.1 11 dex241.txt POWERS OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY I hereby appoint Keith D. Browning my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of CarMax, Inc. for its fiscal year ended February 28, 2003, and any amendment which such attorney-in-fact may deem appropriate or necessary. Signature: /s/ Austin Ligon --------------------------------- Print Name: Austin Ligon Title: President, Chief Executive Officer and Director Exhibit 24.1 POWER OF ATTORNEY I hereby appoint Austin Ligon my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of CarMax, Inc. for its fiscal year ended February 28, 2003, and any amendment which such attorney-in-fact may deem appropriate or necessary. Signature: /s/ Keith D. Browning -------------------------------- Print Name: Keith D. Browning Title: Executive Vice President, Chief Financial Officer and Director Exhibit 24.1 POWER OF ATTORNEY I hereby appoint Austin Ligon or Keith D. Browning my true and lawful attorney-in-fact to sign on my behalf, as an individual and in the capacity stated below, the Annual Report on Form 10-K of CarMax, Inc. for its fiscal year ended February 28, 2003, and any amendment which such attorney-in-fact may deem appropriate or necessary. Signature: /s/ Jeffrey E. Garten --------------------------------- Print Name: Jeffrey E. Garten Title: Director Signature: /s/ W. Robert Grafton --------------------------------- Print Name: W. Robert Grafton Title: Director Signature: /s/ William S. Kellogg --------------------------------- Print Name: William S. Kellogg Title: Director Signature: /s/ Hugh G. Robinson --------------------------------- Print Name: Hugh G. Robinson Title: Director Signature: /s/ Richard L. Sharp --------------------------------- Print Name: Richard L. Sharp Title: Director Signature: /s/ Beth A. Stewart --------------------------------- Print Name: Beth A. Stewart Title: Director Signature: /s/ William R. Tiefel --------------------------------- Print Name: William R. Tiefel Title: Director EX-99.1 12 dex991.txt SECTION 906 CERTIFICATIONS 99.1 Certifications Pursuant to 18 U.S.C. 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 Each of the undersigned hereby certifies, for the purposes of section 1350 of Chapter 63 of Title 18 of the United States Code, in his capacity as an officer of CarMax, Inc. ("CarMax"), that, to his knowledge, the Form 10-K for the period ended February 28, 2003, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of CarMax. Dated: May 29, 2003 By: /s/ Austin Ligon -------------------------- Austin Ligon Chief Executive Officer Dated: May 29, 2003 By: /s/ Keith D. Browning ---------------------------- Keith D. Browning Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to CarMax, Inc. and will be retained by CarMax, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----

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