Circuit City 2006 Annual Report Download - page 48

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Annual rent expense aggregated approximately $13,198,000, including $612,000 to related parties, for 2006,
$10,272,000, including $612,000 to related parties, for 2005 and $7,887,000, including $612,000 to related parties, for
2004. Rent expense for 2006 is net of sublease income of $937,000.
Litigation
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Beginning on May 24, 2005, three shareholder derivative lawsuits were filed, one in the United States
District Court for the Eastern District of New York and two in the Supreme Court of New York, County of Nassau,
against various officers and directors of the Company and naming the Company as a nominal defendant in connection
with the Company’s restatements of its fiscal year 2003 and 2004 financial statements. The defendants and the
Company denied all of the allegations of wrongdoing contained in the complaints. On May 16, 2006, the parties
entered into a stipulation of settlement of this case. By order dated July 6, 2006 the United States District Court for the
Eastern District of New York approved the settlement and dismissed the federal complaint with prejudice. Pursuant to
the settlement the defendants are released from liability and the Company adopted certain corporate governance
principles including the appointment of a lead independent director to, among other things, assist the Board of
Directors in assuring compliance with and implementation of the Company’s corporate governance policies and paid
$300,000 of the legal fees of the plaintiffs. The State court actions were dismissed.
The Company has also been named as a defendant in other lawsuits in the normal course of its business, including
those involving commercial, tax, employment and intellectual property related claims. Based on discussions with legal
counsel, management believes the ultimate resolution of these lawsuits will not have a material effect on the
Company
’
s consolidated financial statements.
Contingency
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The Company is required to collect sales tax on certain of its sales. In accordance with current laws,
approximately 17.9% of the Company’s 2006 domestic sales, 17% of the Company’s 2005 domestic sales and 17% of
the 2004 domestic sales were subject to sales tax. Changes in law could require the Company to collect sales tax in
additional states and subject the Company to liabilities related to past sales.
Employee Benefit Plans
— The Company’s U.S. subsidiaries participate in a defined contribution 401(k) plan covering
substantially all U.S. employees. Employees may invest a percentage of their eligible compensation, limited to
maximum amounts as determined by the Internal Revenue Service. The Company provides a matching contribution to
the plan, determined as a percentage of the employees’ contributions. Aggregate expense to the Company for
contributions to such plans was approximately $514,000 in 2006, $455,000 in 2005 and $436,000 in 2004.
Foreign Exchange Risk Management
— The Company has no 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 would be to minimize the impact of
foreign exchange rate movements on the Company’s operating results. As of December 31, 2006, the Company had no
outstanding forward exchange contracts.
Fair Value of Financial Instruments
— Financial instruments consist primarily of investments in cash and cash
equivalents, trade accounts receivable, 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, 2006, 2005 and 2004, the carrying amounts of cash and cash equivalents, accounts receivable, income
taxes receivable and payable and accounts payable are considered to be representative of their respective fair values
due to their short-term nature. The carrying amounts of the notes payable to banks and the term loan payable are
considered to be representative of their respective fair values as their interest rates are based on market rates. The
estimated fair value of the Company
’
s mortgage loan payable was $8.8 million at December 31, 2005.
Concentration of Credit Risk
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Financial instruments that potentially subject the Company to concentrations of credit
risk consist of cash, cash equivalents and accounts receivable. The Company’s excess cash balances are invested with
high credit quality issuers. Concentrations of credit risk with respect to accounts receivable are limited due to the large
number of customers and their geographic dispersion comprising the Company’s customer base. The Company also
performs on
-
going credit evaluations and maintains allowances for potential losses as warranted.
12.
SEGMENT AND RELATED INFORMATION
The Company operates in one primary business as a reseller of business products to commercial and consumer users.
The Company operates and is internally managed in three operating segments, Technology Products, Industrial
Products and Hosted Software. The Company’s chief operating decision-maker is the Company’s Chief Executive