Circuit City 2005 Annual Report Download - page 61

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Accelerated depreciation
3,059
1,622
Intangible and other assets
12,031
Other
1,757
1,032
Valuation allowances
(14,779
)
(10,643
)
Total non
-
current
18,645
TOTAL
$
$
28,239
The Company has not provided for federal income taxes applicable to the undistributed earnings of its foreign
subsidiaries of $12.4 million as of December 31, 2005, since these earnings are indefinitely reinvested. The
Company has foreign net operating loss carryforwards which expire from 2006 through 2020 except for
carryforwards in the United Kingdom and the Netherlands, which have no expiration. In accordance with SFAS
109 “Accounting for Income Taxes,”
the Company records these benefits as assets to the extent that utilization of
such assets is more likely than not; otherwise, a valuation allowance has been recorded. The Company has also
provided valuation allowances for certain state deferred tax assets and net operating loss carryforwards where it
is not likely they will be realized.
In the fourth quarter of 2005, the Company recorded a valuation allowance of $10.2 million related to
carryforward losses and deferred tax assets in the United Kingdom. The Company’s United Kingdom subsidiary
had recorded losses and has been affected by restructuring activities in recent years. These losses and the loss
incurred for the year ended December 31, 2005 represented evidence for management estimate that a full
valuation allowance for the net deferred tax assets was necessary under SFAS 109. In the fourth quarter of 2005,
the Company also recorded an income tax benefit of $2.7 million as a result of a favorable decision received in
connection with a petition submitted in connection with audit assessments made in 2002 and 2004 in a foreign
jurisdiction.
As of December 31, 2005 the valuation allowances of $15.3 million include $11.1 million related to net operating
loss carryforwards and $2.3 million for other deductible temporary differences in foreign jurisdictions and $1.5
million for state net operating loss carryforwards and $0.4 million for other state deductible temporary
differences. During the year ended December 31, 2005 valuation allowances increased $5,551,000 as a result of
additional losses incurred in foreign and state jurisdictions, net of reductions resulting from changes in deferred
tax assets due to changes in tax laws. Valuation allowances decreased $1,301,000 in 2005 for carryforward losses
utilized for which valuation allowances had been previously provided. During the year ended December 31, 2004
valuation allowances increased $1,373,000 as a result of additional losses incurred and decreased $3,968,000 for
carryforward losses and tax credits utilized for which valuation allowances had been previously provided.
The Company is routinely audited by federal, state and foreign tax authorities with respect to its income taxes.
The Company regularly reviews and evaluates the likelihood of audit assessments and believes it has adequately
accrued for exposures for tax liabilities resulting from future tax audits. To the extent the Company would be
required to pay amounts in excess of reserves or prevail on matters for which accruals have been established, the
Company’s effective tax rate in a given period may be materially impacted. The Company’s federal income tax
returns for fiscal years 2000 through 2004 are currently being audited by the Internal Revenue Service. Although
proposed adjustments have not been received for these years and the outcome of in-progress tax audits is always
uncertain, management believes the ultimate outcome of the audit will not have a material adverse impact on the
Company
’
s consolidated financial statements.
11.
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Leases
— The Company is obligated under operating lease agreements for the rental of certain office and
warehouse facilities and equipment which expire at various dates through September 2026. The Company
currently leases one facility in New York from an entity owned by the Company’s three principal shareholders
and senior executive officers (see Note 4). The Company also acquires certain computer and communications
equipment pursuant to capital lease obligations.
At December 31, 2005, the future minimum annual lease payments for capital leases and related and third-party