Circuit City 2002 Annual Report Download - page 16

increased salary and other operating expenses in the Company's European operations.
For the year ended December 31, 2001, selling, general and administrative expenses totaled $271.6 million, or
17.6% of net sales, compared to $270.9 million, or 16.1% of net sales, in 2000. In 2001, the Company incurred direct
television advertising expenses related to sales of its PCs. The Company also incurred consulting costs in 2001
associated with implementation of a new e-commerce internet platform and development of an internal-use software
system. These expenses were partially offset by a decrease in catalog advertising costs, staff reductions and lower bad
debt expense.
RESTRUCTURING AND OTHER CHARGES
In connection with the completion of construction of a new facility in the United Kingdom, in 2002 the
Company implemented a plan to consolidate the activities of its three United Kingdom locations into the new facility.
The Company incurred $4.1 million of costs associated with the plan, including $1.9 million for recruitment, staff
relocation and severance and benefits for approximately 150 terminated employees, $1.7 million of charges for other
exit costs, primarily facilities closing and lease terminations, and $0.5 million of non-cash costs for impairment of the
carrying value of fixed assets. During the second quarter of 2002 the Company recorded a non-recurring write-off of
$13.2 million resulting from the Company's decision to discontinue development of internal-use computer software. In
2001 approximately $2 million of previously capitalized costs associated with software projects which were abandoned
were written off. The Company also incurred approximately $750,000 of costs in 2001 related to the consolidation of
one of its domestic warehouse locations.
INCOME (LOSS) FROM OPERATIONS
The Company had a loss from operations of $7.8 million in 2002, income from operations of $2.5 million in
2001 and a loss from operations for the year ended December 31, 2000 of $61.0 million. The loss from operations in
2002 includes $17.3 million of restructuring and other charges. Income from operations in 2001 includes the
elimination of a liability of $3 million recorded in a prior year which the Company determined was no longer required
and expense of $2.8 million for restructuring and other charges. The loss from operations in 2000 resulted from a
decline in gross profit and increased selling, general and administrative expenses. During the second quarter of 2000,
the Company sold its internet auction subsidiary, EZBid Inc., and closed a small software sales subsidiary, which
together eliminated approximately $5 million in operating losses on an annualized basis. Operating income in Europe
decreased to $7.8 million in 2002, from $18.2 million in 2001 and $17.3 million in 2000 as a result of decreased gross
profit and increased selling, general and administrative expenses.
INTEREST AND OTHER INCOME and INTEREST EXPENSE
Interest expense was $1.7 million in 2002, $1.8 million in 2001 and $4.4 million in 2000. The Company had
decreased borrowings under its United States and United Kingdom short-term credit facilities in 2002, the effect of
which was which was partially offset by interest expense on new long-term borrowings entered into during the year.
The decrease in 2001 resulted from decreased short-term borrowings in the United States. The weighted average
interest rate on short-term borrowings was 6.3% in 2002, 6.6% in 2001 and 7.9% in 2000. Interest and other income
was $0.4 million in 2002, $0.3 million in 2001 and $0.1 million in 2000.
INCOME TAXES
The Company recorded an income tax benefit of $1.0 million in 2002, an income tax provision of $389,000 in
2001 and an income tax benefit of $24.5 million in 2000. The effective rates were 11.5% in 2002, 37.3% in 2001 and
37.5% in 2000. The mix in taxable income and losses between the Company's U. S. and foreign operations and the
expected utilization of the Company's deferred tax assets significantly impacted the recording of the 2002 tax benefit.
In 2002, the Company also incurred additional tax expense in connection with audit assessments in two of its foreign
subsidiaries. In 2002, the Company did not recognize certain foreign tax credits and certain state tax benefits on losses
in the United States due to the inability to carry such credits and losses back to prior years. Accordingly, valuation
allowances were recorded against the deferred tax assets associated with those tax credits and net operating loss
carryforwards.