Circuit City 2003 Annual Report Download - page 14

gross profit ratio in the Company’s European operations, which was affected by intense pricing pressure in certain of its
markets. The gross profit ratio in the Company’s North American business decreased only slightly from 2001 as pricing
pressures were partially offset by cost reductions resulting from initiatives undertaken in recent years and production
efficiencies achieved in the Company’s PC assembly business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2003 were $251.5 million compared to $256.1 million in 2002, a
net decrease of $4.6 million or 1.8%. The decrease was realized in our North American operations and included
decreased television advertising spending related to sales of the Company’s PCs. In addition, as a result of increased
internet sales, we were able to leverage our total advertising spending and reduce our other advertising expenses by
reducing the number of catalogs we mailed. These decreases were partially offset by approximately $13 million of
increased costs in Europe resulting from the effects of changes in foreign exchange rates and the effects of the adoption
of EITF 02-16. The adoption of EITF 02-16 resulted in the reclassification of $14.5 million of vendor consideration as a
reduction of cost of sales, which would previously have been recorded as a reduction of advertising expense. As a
percentage of sales, selling, general and administrative expenses were 15.2% (14.3% on a non-GAAP basis before the
adoption of EITF 02-16) compared to 16.5% in the year-ago period.
Selling, general and administrative expenses totaled $256.1 million, or 16.5% of net sales, in 2002, a decrease of
$15.6 million, or 5.7%, compared to $271.6 million, or 17.6% of net sales, in 2001. Reductions in catalog costs
comprised the largest portion of the decrease. The Company also reduced its employee count in the United States,
lowering its salary expense and related benefit costs in 2002. Selling, general and administrative expenses also declined
as a result of actions taken to reduce costs and tighten discretionary spending. These reductions were partially offset by
increased salary and other operating expenses in the Company’s European operations.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2003 we implemented a plan to consolidate the warehousing facilities in our United States
computer supplies business. We recorded $713,000 of costs related to this plan in the fourth quarter, including $233,000
of non-cash costs for impairment of the carrying value of fixed assets and $480,000 of charges for other exit costs.
During 2002 we implemented a plan to consolidate the activities of our three United Kingdom locations into a
new facility we had constructed. We 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 fourth quarter of fiscal 2003 we recorded $2.2 million of
additional costs, net of reductions, related to this plan as a charge to operations. These charges consisted of $1.6 million
of other restructuring activities as we adjusted the original estimates of lease and contract termination costs and
$600,000 of additional non-cash asset impairments, related to buildings vacated.
In 2001 approximately $2 million of previously capitalized costs associated with software projects abandoned
were written off. We also incurred approximately $750,000 of costs in 2001 related to the consolidation of one of our
domestic warehouse locations.
In August 2003 we settled our litigation with a software developer and reversed a previously recorded liability of
$1.3 million, which was no longer required.
During the second quarter of 2003, we purchased the minority ownership of our Netherlands subsidiary for
approximately $2.6 million, pursuant to the terms of the original purchase agreement. All of the purchase price was
attributable to goodwill and, as a result of an impairment analysis, was written off in accordance with Statement of
Financial Accounting Standards 142, “Goodwill and Other Intangible Assets."
During the second quarter of 2002 we recorded a non-recurring write-off of $13.2 million resulting from our
decision to discontinue development of internal-use computer software.
INCOME (LOSS) FROM OPERATIONS