Circuit City 1998 Annual Report Download - page 32

8. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES - The Company is obligated under operating lease agreements for the rental of certain office and warehouse facilities and equipment
which expire at various dates through December 2013.
At December 31, 1998 future minimum annual lease payments for related and third-party leases were as follows (in thousands):
Rent expense for the years ended December 31, 1998, 1997 and 1996 aggregated approximately $7,665,000, $7,151,000 and $7,406,000,
respectively.
GUARANTEES - The Company has guaranteed a mortgage obtained by an affiliate ($2 million at December 31, 1998) relating to property
which the Company leases from the affiliate. Additionally the Company's U.K. subsidiaries have granted a security interest for substantially all
of their assets to secure a loan and a line of credit with a U.K. financial institution.
LITIGATION - In March 1998 the Company initiated legal action against a bankrupt supplier and its lenders (the "Defendants") seeking a
declaration that the Company has contractual rights of offset against indebtedness to the supplier, including $4 million drawn by one of the
lenders under a letter of credit and monetary damages of $2.8 million. In September 1998 the Defendants denied the Company's allegations and
counterclaimed for amounts outstanding together with damages totaling $12.2 million. The Company believes that the Defendants' claims are
without merit and asked the Court to dismiss the counterclaims. Management believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's consolidated financial statements.
The Company has been named as a defendant in other lawsuits incidental to its business. Management of the Company, based on discussions
with legal counsel, believes the ultimate resolution of these lawsuits will not have a material effect on the Company's consolidated financial
position or results of operations.
CONTINGENCY - The Company is required to collect sales tax on certain of its out-of-state sales. In accordance with current law,
approximately 16% of the Company's 1998 domestic sales were subject to sales tax. A change in law could require the Company to collect
sales tax in additional states.
EMPLOYEE BENEFIT PLANS - Certain of the U.S. subsidiaries participate in defined contribution 401(k) plans covering eligible employees
as defined by the plan document. Contributions to the plans by the Company are determined as a percentage of the employees' contributions.
Aggregate expense to the Company for contributions to such plans was approximately $397,000, $373,000 and $267,000 in the years ended
December 31, 1998, 1997 and 1996, respectively.
Liabilities accrued by certain foreign entities for employee termination indemnities, determined in accordance with labor laws and labor
agreements in effect in the respective country, were not material.
FOREIGN EXCHANGE RISK MANAGEMENT - The Company has limited involvement with derivative financial instruments and does not
use them for trading purposes. The Company may enter into foreign currency options or forward exchange contracts to hedge certain foreign
currency transactions. The intent of this practice is to minimize the impact of foreign exchange rate movements on the Company's operating
results. As of December 31,1998, the Company had no outstanding forward exchange contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments consist primarily of investments in cash, trade account receivables,
accounts payable and debt obligations. The Company estimates the fair value of financial instruments based on interest rates available to the
Company and by comparison to quoted market prices. At December 31, 1998 and 1997, the fair value of the Company's financial instruments
approximated their carrying values.
CONCENTRATION OF CREDIT RISK - Concentrations of credit risk with respect to trade account receivables are limited due to the large
number of customers comprising the Company's customer base.
9. SEGMENT AND RELATED INFORMATION
RELATED PARTY THIRD PARTY TOTAL
1999................................ $ 1,584 $ 3,718 $ 5,302
2000................................ 1,584 3,849 5,433
2001................................ 1,224 3,515 4,739
2002................................ 1,224 3,219 4,443
2003................................ 1,224 3,158 4,382
2004-2008........................... 4,743 12,692 17,435
2009-2013........................... 3,781 3,781
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$ 11,583 $ 33,932 $ 45,515
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