Radio Shack 2004 Annual Report Download - page 50

Notes to Consolidated Financial Statements
RadioShack Corporation and Subsidiaries
48 AR2004
Additionally, in the second quarter of 2002, we received pay-
ments of $27.7 million in partial settlement of amounts owed
to us under a tax sharing agreement that was the subject of
an arbitration styled Tandy Corporation and T.E. Electronics,
Inc. vs. O’Sullivan Industries Holdings, Inc. This partial settle-
ment followed a ruling in RadioShack’s favor by the arbitra-
tion panel. This arbitration was commenced in July 1999 and
the settlement also requires O’Sullivan to make ongoing pay-
ments under this tax sharing agreement that was entered into
by the parties at the time of O’Sullivan’s initial public offering.
We are currently a party to various class action lawsuits
alleging that we misclassified certain RadioShack store man-
agers as exempt from overtime in violation of the Fair Labor
Standards Act, including a lawsuit styled Alphonse L. Perez,
et al. v. RadioShack Corporation, filed in the United States
District Court for the Northern District of Illinois. While the
alleged damages in these lawsuits are undetermined, they
could be substantial. We believe that we have meritorious
defenses, and we are vigorously defending these cases.
Furthermore, we fully expect these cases to be favorably
determined as a matter of federal law. If, however, an adverse
resolution of any of these lawsuits occurs, we believe they
could have a material adverse effect on our results of opera-
tions for the year in which resolution occurs. However, we
do not believe that such an adverse resolution would have
a material impact on our financial condition or liquidity. The
liability, if any, associated with these lawsuits was not deter-
minable at December 31, 2004.
We have various other pending claims, lawsuits, disputes
with third parties, investigations and actions incidental to
the operation of our business. Although occasional adverse
settlements or resolutions may occur and negatively impact
earnings in the period or year of settlement, it is our belief
that their ultimate resolution will not have a material adverse
effect on our financial condition or liquidity.
NOTE 15 Commitments and Contingent Liabilities
Lease Commitments: We lease rather than own most of our
facilities. Our lease agreements expire at various dates
through January 2016. Some of these leases are subject to
renewal options and provide for the payment of taxes, insur-
ance and maintenance. Our retail locations comprise the
largest portion of our leased facilities. These locations are
primarily in major shopping malls and shopping centers
owned by other companies. Some leases are based on a
minimum rental plus a percentage of the store's sales in
excess of a stipulated base figure (“Contingent Rent”).
Certain leases contain escalation clauses. We also lease
distribution centers and office space. Additionally, we lease
automobiles and information systems equipment.
Future minimum rent commitments at December 31, 2004,
under long-term non-cancelable operating leases (net of
immaterial amounts of sublease rent income) are included
in the following table.
(In millions)
2005 $182.3
2006 155.0
2007 115.2
2008 81.3
2009 55.1
2010 and thereafter 80.6
Total minimum lease payments $669.5
Future minimum rent commitments in the table above exclude
future rent obligations associated with stores closed under
the 1996 and 1997 restructuring plan. Estimated payments
to settle future rent obligations associated with these stores
have been accrued in the restructuring reserve (see Note 10).
Rent Expense
Year Ended December 31,
(In millions) 2004 2003 2002
Minimum rents $203.0 $201.4 $197.0
Occupancy cost 45.3 44.3 43.9
Contingent rents 11.1 4.4 4.0
Total rent expense $259.4 $250.1 $244.9
From time to time, we enter into store operating leases that
provide for free or reduced rental periods, usually during the
finish-out of our retail locations before the store opens for
business. These periods are commonly referred to as “rent
holidays” and average 60 days. Prior to January 2005, we did
not recognize straight-line rent expense during the pre-open-
ing rent holiday period but rather began recording rent
expense from the day the store opened. Beginning January 1,
2005, we have changed our accounting policy by including
the rent holiday period in our straight-line rent calculation.
We do not believe that this change in policy will have a mate-
rial effect on our future consolidated statements of income
or balance sheets, and will have no effect on our cash flows.
Furthermore, we believe that the impact of our prior account-
ing for pre-opening rent holiday periods on current and
prior periods is immaterial and therefore no accounting
adjustments are necessary or have been made.
Contingent Liabilities: We have contingent liabilities related
to retail leases of locations which were assigned to other
businesses. The majority of these contingent liabilities relate
to various lease obligations arising from leases that were
assigned to CompUSA, Inc. as part of the sale of our
Computer City, Inc. subsidiary to CompUSA, Inc. in August
1998. In the event CompUSA or the other assignees, as