CarMax 2002 Annual Report Download - page 63

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61 CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002
CarMax could take advantage of the favorable economic terms
available to the Company as a large retailer. The Company has
assigned each of these leases to CarMax. Despite the assignment
and pursuant to the terms of the leases, the Company remains
contingently liable under the leases. For example, if CarMax
were to fail to make lease payments under one or more of the
leases, the Company may be required to make those payments
on CarMax’s behalf. In recognition of this ongoing contingent
liability, CarMax has agreed to make a one-time special dividend
payment to Circuit City Stores, Inc. on the separation date,
assuming the separation is completed. We currently expect this
special dividend to be between $25 million and $35 million.
MARKET RISK
Receivables Risk
The Company manages the market risk associated with the pri-
vate-label credit card and bankcard revolving loan portfolios of
Circuit City’s finance operation. Portions of these portfolios
have been securitized in transactions accounted for as sales in
accordance with SFAS No. 140 and, therefore, are not pre-
sented on the Group balance sheets.
CONSUMER REVOLVING CREDIT RECEIVABLES. The majority of
accounts in the private-label credit card and bankcard portfolios
are charged interest at rates indexed to the prime rate,
adjustable on a monthly basis subject to certain limitations. The
balance of the accounts are charged interest at a fixed annual
percentage rate. As of February 28, 2002, and February 28,
2001, the total outstanding principal amount of private-label
credit card and bankcard receivables had the following interest
rate structure:
(Amounts in millions) 2002 2001
Indexed to prime rate............................................ $2,645 $2,596
Fixed APR............................................................. 202 203
Total...................................................................... $2,847 $2,799
Financing for the private-label credit card and bankcard
receivables is achieved through asset securitization programs that,
in turn, issue both private and public market debt, principally at
floating rates based on LIBOR and commercial paper rates.
Receivables held for sale are financed with working capital. The
total principal amount of receivables securitized or held for sale at
February 28, 2002, and February 28, 2001, was as follows:
(Amounts in millions) 2002 2001
Floating-rate securitizations .................................. $2,798 $2,754
Held for sale.......................................................... 49 45
Total...................................................................... $2,847 $2,799
INTEREST RATE EXPOSURE. Circuit City is exposed to interest
rate risk on its securitized credit card portfolio, especially when
interest rates move dramatically over a relatively short period of
time. We have attempted to mitigate this risk through matched
funding. In addition, our ability to increase the finance charge
yield of our variable rate credit cards may be contractually lim-
ited or limited at some point by competitive conditions.
Generally, changes only in interest rates do not have a material
impact on the Group results of operations.
The market and credit risks associated with financed deriva-
tives are similar to those relating to other types of financial
instruments. Refer to Note 11 to the Group financial state-
ments for a description of these items. Market risk is the expo-
sure created by potential fluctuations in interest rates. On
behalf of Circuit City, the Company enters into interest rate
cap agreements to meet the requirements of the credit card
receivable securitization transactions. The Company has entered
into offsetting interest rate cap positions and, therefore, does
not anticipate significant market risk arising from interest rate
caps. 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.
FORWARD-LOOKING STATEMENTS
Company statements that are not historical facts, including
statements about management’s expectations for fiscal year 2003
and beyond, are forward-looking statements and involve various
risks and uncertainties. Refer to the “Circuit City Stores, Inc.
Management’s Discussion and Analysis of Results of Operations
and Financial Condition” for a review of important factors that
could cause actual results to differ materially from estimates or
projections contained in our forward-looking statements.
CIRCUIT CITY GROUP