CarMax 2002 Annual Report Download - page 85

83 CIRCUIT CITY STORES, INC. ANNUAL REPORT 2002
transfers the purchased receivables to a securitization trust. The
securitization trust then issues asset-backed securities secured by
the transferred receivables in public offerings, and the proceeds
are distributed through the special purpose subsidiary to
CarMax’s finance operation. CarMax continues to service the
transferred receivables for a fee. Asset-backed securities were
issued totaling $644.0 million in October 1999, $655.4 million
in January 2001 and $641.7 million in November 2001.
At February 28, 2002, the aggregate principal amount of
securitized automobile loan receivables totaled $1.54 billion. At
February 28, 2002, there were no provisions providing recourse
to the Company for credit losses on the securitized automobile
loan receivables. CarMax 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.
CONTRACTUAL OBLIGATIONS(1)
2 to 3 4 to 5 After 5
(Amounts in millions) Total 1 Year Years Years Years
Allocated contractual
obligations:
Long-term debt ................... $ 78.6 $ 78.6 $ – $ – $ –
Promissory note................... 8.5 8.5 – – –
Operating leases................... 723.0 43.1 86.7 84.7 508.5
Lines of credit...................... 1.4 1.4 – – –
Total.......................................... $811.5 $131.6 $86.7 $84.7 $508.5
(1) Amounts are based on the capital structure of Circuit City Stores, Inc. as of February 28,
2002. Future obligations depend upon the final outcome of the proposed separation of
CarMax.
CarMax currently operates 23 of its sales locations pursuant
to various leases under which Circuit City Stores, Inc. was the
original tenant and primary obligor. Circuit City Stores, Inc.,
and not CarMax, had originally entered into these leases so that
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
automobile installment loan portfolio of CarMax’s finance
operation. A portion of this portfolio has been securitized in
transactions accounted for as sales in accordance with SFAS
No. 140 and, therefore, is not presented on the Group
balance sheets.
AUTOMOBILE INSTALLMENT LOAN RECEIVABLES. At February 28,
2002, and February 28, 2001, all loans in the portfolio of auto-
mobile 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. Receivables held for invest-
ment or sale are financed with working capital. The total prin-
cipal amount of receivables securitized or held for investment
or sale as of February 28, 2002, and February 28, 2001, was
as follows:
(Amounts in millions) 2002 2001
Fixed-rate securitizations....................................... $1,122 $ 984
Floating-rate securitizations
synthetically altered to fixed ............................ 413 299
Floating-rate securitizations .................................. 1 1
Held for investment(1)........................................... 12 9
Held for sale.......................................................... 2 3
Total...................................................................... $1,550 $1,296
(1) Held by a bankruptcy-remote special purpose subsidiary.
INTEREST RATE EXPOSURE. Interest rate exposure relating to the
securitized automobile loan receivables represents a market risk
exposure that we manage with matched funding and interest
rate swaps matched to projected payoffs. The market and credit
risks associated with financial derivatives are similar to those
relating to other types of financial instruments. Refer to Note
11 to the Group financial statements for a description of these
items. Market risk is the exposure created by potential fluctua-
tions in interest rates. The Company does not anticipate signifi-
cant market risk from swaps because 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.
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.
CARMAX GROUP