Circuit City 1998 Annual Report Download - page 14

expenses as a percentage of net sales. While selling, general and administrative expenses increased by $26.1 million or 14.5% to $206.3 million
in 1997 from $180.1 million in 1996, as a percentage of net sales they decreased to 18.0% in 1997 from 19.8% in 1996. The decrease as a
percentage of net sales was primarily attributable to reduced catalog costs in North America as a result of the increased efficiencies from larger
average order sizes, vendor supported advertising, continued expense control and the leveraging of selling, general and administrative expenses
over a larger sales base. Included in selling, general and administrative expenses in 1997 was a one time charge of $9.6 million incurred during
the third quarter relating to the impairment of certain long lived assets, principally goodwill.
As a result of the above, income from operations decreased by $10.2 million or 14.7% to $59.3 million in 1997 from $69.5 million in 1996.
Income from operations as a percentage of net sales decreased to 5.2% from 7.6% in 1996.
Interest income increased $ .8 million to $3.3 million in 1997 from $2.5 million in 1996 primarily due to higher levels of investments in short-
term securities. Interest expense decreased $ .1 million to $ .4 million in 1997 from $ .5 million in 1996.
Net income decreased $4.9 million or 11.2% to $38.8 million in 1997 principally as a result of the above.
SEASONALITY
The operations of the Company are somewhat seasonal. In particular, net sales have historically been modestly weaker during the second and
third quarter as a result of lower business activity during the summer months. The following table sets forth net sales, gross profit and income
from operations for each of the quarters since January 1, 1997
(AMOUNTS IN MILLIONS).
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to maintain a strong financial position. Primary capital needs are to finance working capital for sales growth,
acquisitions and investments in property, equipment and information technology. The Company's primary source of financing has been cash
from operations, allowing it to remain virtually debt-free. The Company believes that its cash flow from operations, existing cash and short-
term investments and available lines of credit will be adequate to support its current and anticipated activities.
Cash flow from operating activities was $37.7 million in 1998, $33.1 million in 1997 and $22.7 million in 1996. Cash flow is provided
primarily by net income and depreciation. The increase in inventories and accounts payable and accrued expenses in 1998 resulted from
expansion activities in the Company's PC assembly operation and increased sales activity. The increase in cash flow from 1996 to 1997 was
due to improved asset management, primarily related to accounts receivable and inventory.
Net cash of $13.0 million was used in 1998 in investing activities for business acquisitions and additions to property, plant and equipment.
These included capacity expansion at the Company's PC assembly factory, completion of the new Compton, California facility and
improvements to information technology systems. Net cash used in investing activities in 1997 was primarily for the acquisition of Midwest
Micro and the acquisition of furniture, fixtures and leasehold improvements needed to accommodate increased staff levels at the new Compton,
California facility. Short-term investments were decreased by $22.0 million as partial funding for these activities resulting in net cash used of
$25.2 million for investing activities for the year. Net cash used in investing activities in 1996 was $39.8 million, employed for the acquisition
of computer equipment and additional equipment at the Naperville, Illinois facility to accommodate increased staff levels. Surplus cash
balances of $31.0 million were invested.
Cash was used in financing activities in 1998 ($25.4 million) and in 1997 ($0.5 million) and provided $23.9 million in 1996. In 1998, the
Company used $28.6 million of cash to purchase shares of its common stock. The use of funds in 1997 was for the repayment of long-term
debt. In 1996, the net proceeds from issuance of shares of common stock was partially used to repay long-term bank debt and settle long-term
capital leases.
The Company maintains secured and unsecured lines of credit with various financial institutions under which the maximum aggregate amount
available is approximately $100 million. As of December 31, 1998, the Company had no outstanding borrowings under these lines of credit.
Borrowings under the lines bear interest based on either the prime rate or LIBOR. The maximum borrowings under the facilities are reduced
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
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NET SALES...................................... $358.3 $330.5 $359.8 $387.1
GROSS PROFIT................................... $75.4 $67.1 $71.6 $74.5
INCOME FROM OPERATIONS......................... $20.1 $11.6 $15.6 $17.1
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
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Net sales...................................... $273.5 $259.5 $259.7 $352.7 (1)
Gross profit................................... $69.4 $64.2 $57.3 $74.7
Income from operations......................... $18.6 $17.9 $2.5 $20.3
(1) Includes approximately $62 million of net sales from Midwest Micro acquired on September 30, 1997.