Circuit City 2005 Annual Report Download - page 24

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 deductible.
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.
For the years ended December 31, 2005, 2004 and 2003, we have not recognized certain foreign tax credits,
certain state deferred tax assets 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 and our determination that it was more likely than not that
we would not generate sufficient future taxable income to realize these assets. Accordingly, valuation allowances were
recorded against the deferred tax assets associated with those items. If we are able to realize all or part of these deferred
tax assets in future periods, it will reduce our provision for income taxes by a release of the corresponding valuation
allowance.
NET INCOME
As a result of the above, net income was $11.4 million, or $.33 per basic share and $.31 per diluted share, for the
year ended December 31, 2005, was $10.2 million, or $.30 per basic share and $.29 per diluted share, for the year
ended December 31, 2004 and was $3.2 million, or $.09 per basic and diluted share, for the year ended December 31,
2003.
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, 2004 (amounts in millions).
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
to meet existing strategic and financing objectives. Therefore, liquidity cannot be considered separately from capital
resources that consist of current and potentially available funds for use in achieving long-range business objectives and
meeting debt service commitments. Currently, our liquidity needs arise primarily from working capital requirements
and capital expenditures.
Our working capital was $169.8 million at December 31, 2005, an increase of $21.8 million from $148.0 million
at the end of 2004. This was due principally to a $34.7 million increase in cash and a $5.3 million increase in accounts
receivable offset by a $5.9 million increase in accounts payable, a $1.8 million increase in short-term borrowings, a
$3.2 million increase in accrued expense and other current liabilities, a $3.3 million decrease in inventories and a $4.0
million decrease in prepaid expenses and other current assets. The $3.3 million decrease in our inventories was
comprised of a $6.2 million decrease in our European inventories, which have been lowered in response to continuing
weakness in those markets and declined in dollar terms as a result of changes in exchange rates. This decrease was
March 31
June 30
September 30
December 31
2005
Net sales
$538
$506
$489
$583
Percentage of year's net sales
25.4%
23.9%
23.1%
27.6%
Gross profit
$80
$71
$70
$86
Income from operations
$5
$3
$8
$18
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