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CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002 74
Accordingly, no servicing asset or liability has been recorded.
The table below summarizes certain cash flows received from
and paid to the securitization trusts:
Years Ended February 28
(Amounts in thousands) 2002 2001
Proceeds from new securitizations ................ $1,193,300 $1,092,500
Proceeds from collections reinvested
in previous credit card securitizations...... $1,591,085 $1,730,511
Servicing fees received .................................. $ 51,777 $ 52,044
Other cash flows received on
retained interests*.................................... $ 195,375 $ 173,775
*This amount represents cash flows received from retained interests by the transferor other
than servicing fees, including cash flows from interest-only strips and cash above the mini-
mum required level in cash collateral accounts.
When determining the fair value of retained interests,
Circuit City estimates future cash flows using management’s
projections of key factors, such as finance charge income,
default rates, payment rates, forward interest rate curves and
discount rates appropriate for the type of asset and risk. Circuit
City employs a risk-based pricing strategy that increases the
stated annual percentage rate for accounts that have a higher
predicted risk of default. Accounts with a lower risk profile may
qualify for promotional financing.
Future finance income from securitized credit card receiv-
ables that exceeds the contractually specified investor returns
and servicing fees (interest-only strips) is carried at fair value,
amounted to $131.9 million at February 28, 2002 and $131.0
million at February 28, 2001, and is included in net accounts
receivable. Gains of $167.8 million on sales of credit card
receivables were recorded in fiscal 2002; gains of $176.2 million
on sales of credit card receivables were recorded in fiscal 2001.
The fair value of retained interests at February 28, 2002, was
$394.5 million, with a weighted-average life ranging from 0.2
years to 1.8 years. The following table shows the key economic
assumptions used in measuring the fair value of retained inter-
ests at February 28, 2002, and a sensitivity analysis showing the
hypothetical effect on the fair value of those interests when
there are unfavorable variations from the assumptions used. Key
economic assumptions at February 28, 2002, are not materially
different from assumptions used to measure the fair value of
retained interests at the time of securitization. These sensitivi-
ties 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 interest 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 Impact on Fair Impact on Fair
(Dollar amounts Used Value of 10% Value of 20%
in thousands) (Annual) Adverse Change Adverse Change
Payment rate ......... 6.8%–10.4% $ 8,426 $15,629
Default rate ........... 7.9%–17.1% $23,315 $46,363
Discount rate......... 8.0%–15.0% $ 2,742 $ 5,454
11. FINANCIAL DERIVATIVES
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 total notional
amount of interest rate caps outstanding was $654.9 million at
February 28, 2002, and $839.4 million at February 28, 2001.
Purchased interest rate caps were included in net accounts
receivable and had a fair value of $2.4 million as of February
28, 2002, and $6.5 million as of February 28, 2001. Written
interest rate caps were included in accounts payable and had a
fair value of $2.4 million as of February 28, 2002, and $6.5
million at February 28, 2001.
The market and credit risks associated with interest rate caps
are similar to those relating to other types of financial instru-
ments. Market risk is the exposure created by potential fluctua-
tions in interest rates and is directly related to the product type,
agreement terms and transaction volume. 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.
12. CONTINGENT LIABILITIES
In the normal course of business, Circuit City is involved in
various legal proceedings. Based upon the evaluation of the
information presently available, management believes that the
ultimate resolution of any such proceedings will not have a
material adverse effect on the Circuit City Group’s financial
position, liquidity or results of operations.