Circuit City 2004 Annual Report Download - page 19

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recognized no tax benefit and losses in a foreign jurisdiction where the benefit rate is lower than the rate in the United
States. The effective tax rate in 2003 was adversely affected by the goodwill impairment write-off, which is not tax
deducible. State and local taxes in the United States did not increase the effective tax rates in 2004 or 2003 as a result
of the utilization of carryforward losses for which valuation allowances were previously provided. The mix in taxable
income and losses between our U. S. and foreign operations and the expected utilization of our deferred tax assets
significantly impacted the recording of the 2002 tax benefit. In 2002, we also incurred additional tax expense in
connection with audit assessments in two of our foreign subsidiaries. For the years ended December 31, 2004, 2003 and
2002, we have not recognized certain foreign tax credits, certain state tax benefits on losses in the United States and
certain benefits on losses in foreign tax jurisdictions due to our 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the first half of 2002, we completed the transitional review for goodwill impairment required by SFAS
142. The review indicated that the entire carrying value of the goodwill recorded on our consolidated balance sheet was
impaired as of January 1, 2002. Accordingly, we recorded a transitional impairment loss of $68 million ($51 million
net of tax or a net loss per share of $1.50) as a cumulative effect of change in accounting principle in our statements of
operations for the year ended December 31, 2002.
19
NET INCOME (LOSS)
As a result of the above, net income for 2004 was $10.2 million, or $.30 per basic share and $.29 per diluted
share, and for 2003 was $3.2 million, or $.09 per basic and diluted share. The net loss for 2002 was $58.4 million, or
$1.71 per basic and diluted share.
Seasonality
Net sales have historically been modestly weaker during the second and third quarters as a result of lower
business activity during those months. The following table sets forth the net sales, gross profit and income (loss) from
operations for each of the quarters since January 1, 2003 (amounts in millions) .
March 31 June 30 September 30 December 31
-------- ------- ------------
-----------
2004
----
Net sales $485 $433 $458 $552
Percentage of year's net sales 25.1% 22.5% 23.8% 28.6%
Gross profit $76 $68 $71 $71
Income from operations $7 $2 $4 $6
2003
----
Net sales $425 $389 $404 $437
Percentage of year's net sales 25.7% 23.5% 24.4% 26.4%
Gross profit $71 $63 $66 $64
Income (loss) from operations $7 $(1) $2 $0
Financial Condition, Liquidity and Capital Resources
Liquidity is the ability to generate sufficient cash flows to meet obligations and commitments from operating
activities and the ability to obtain appropriate financing and to convert into cash those assets that are no longer required