Circuit City 1998 Annual Report Download - page 15

where applicable by the value of any outstanding letters of credit issued on behalf of the Company. The Company does not anticipate any
difficulty in renewing or replacing any if its lines of credit as they expire.
The Company is party to certain litigation, as disclosed in "Commitments and Contingencies" in the Notes to Consolidated Financial
Statements, the outcome of which the Company believes will not have a material adverse effect on its consolidated financial statements.
Anticipated capital expenditures in 1999 are expected to approximate $20 million, which the Company plans to fund out of cash from
operations and existing cash and cash equivalents. These capital expenditures are primarily for the expansion of the Company's PC assembly
operation, construction of a new distribution center and the acquisition of information technology systems and other fixed assets.
YEAR 2000 COMPLIANCE
The Company is in the process of analyzing and addressing what is known as the year 2000 (or "Y2K") issue. Based on current information,
the Company believes that it will be year 2000 compliant in a timely manner and the cost of achieving such compliance will not have a
materially adverse effect on the Company's results of operations or financial condition. As noted in the following discussion, however, there are
multiple variables in determining whether full Y2K compliance can be achieved, a number of which are dependent on efforts of third parties.
BACKGROUND.
This issue has arisen because many existing computer programs use only two digits instead of four (E.G., "98" instead of "1998") to identify a
year in the data field. This is a holdover from the days when businesses first started using computers and electronic memory was limited and
storage was expensive. These programs were designed and developed without considering the impact of the upcoming change in the century.
Accordingly, some computers can not determine if the reference to the year "02" means 2002 or 1902. The failure of such applications or
systems to properly recognize the dates beginning in the year 2000 could result in miscalculations or even systems failures. The Company
could be affected by this problem both as a user of computers and as a direct marketer and retail vendor of PCs and computer related products
(including private label PCs assembled by its Midwest Micro subsidiary).
In 1998 the Company established a Year 2000 Team to assess the Company's Y2K compliance situation. This team consists of the Company's
Chief Financial Officer, Chief Information Officer, Controller, General Counsel and a representative from the Company's management
information system (MIS) department.
INTERNAL SYSTEMS
The Company's Y2K Team established a plan to have all of the Company's computer and computer-
dependent systems tested and, if necessary,
modified or replaced to ensure Y2K compliance. Each of the Company's computers and computer dependent systems has been analyzed to
assess what would be the impact on the Company if the system becomes materially impaired due to Y2K non-compliance. Each system has
been placed in one of three categories based on the level of risk to the Company - Level I (catastrophic risk), Level II (critical risk) and Level
III (sustainable risk). The Company is now in the process of modifying those systems identified during the assessment as Level I risks and
doing live tests of the Level I and Level II systems to ascertain anticipated Y2K compliance. Based on its analysis to-date, the Company
believes that all of its internal computer systems (hardware, system software and applications software) and computer-dependent systems,
including technology embedded in the Company's machinery and other equipment to the extent that it is date sensitive, are currently Y2K
compliant or will, through the replacement or modification of existing hardware and software, be made Y2K complaint in a timely manner. A
target date of July 1, 1999 has been fixed for such compliance. The Company believes at this time that it should be able to meet such target
date.
The Company has not retained any outside service provider to conduct independent verification of the Company's compliance status and does
not at this time intend to hire any such service provider but is utilizing a third-party software program to test, assess and repair non-mainframe
hardware.
As a direct marketer of products, the Company is particularly dependent on the ability of telecommunications, shipping and credit card
companies to provide services. The Company has contacted its key vendors and service providers to ascertain their Y2K compliance to the
extent that their noncompliance could affect the Company's internal systems or other aspects of the Company's business. The Company expects
to have completed this process by June 1999. The Company at this time cannot make any prediction as to the degree of compliance by such
vendors and service providers or the consequence to the Company of any noncompliance. Any noncompliance by such service providers could
have a material adverse impact on the Company.
Similar issues will be faced with the Company's banks and payroll services, as well as other vendors. Any serious Y2K problems which
significant vendors and service providers encounter could materially adversely impact the Company. Since the Company's customer base is
diverse and no one customer accounts for a significant portion of the Company's business, the Company does not at this time believe that it is
necessary to query customers on their Y2K compliance status.
While the Company believes that the efforts which it has taken and plans to take should be sufficient to identify and correct any Y2K problems
before December 31, 1999, there can be no assurance that the Company will be fully Y2K complaint in a timely manner.