Radio Shack 2003 Annual Report Download - page 28

RADIOSHACK 2003 Annual Report
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Gain on Contract Termination
RadioShack and Microsoft mutually agreed during 2002 to
terminate their agreement and settle the remaining com-
mitments each had to one another. The termination of this
agreement took effect at the start of the fourth quarter of
2002, upon satisfaction of several contractual obligations.
The net financial result was an $18.5 million gain (princi-
pally cash received), driven primarily by the settlement of a
multi-year obligation Microsoft had to connect our stores
with broadband capabilities.
Impairment of Long-Lived Assets
AmeriLink was acquired in 1999 to provide us with residen-
tial installation capabilities for the technologies and
services offered in our retail stores. As a result of continued
difficulties in the DTH business and a refocus during the
fourth quarter on our satellite installation strategy, together
with a revised cash flow projection for our overall installa-
tion business, we determined that the remaining long-lived
assets associated with RSIS were impaired.We compared
the carrying value of these long-lived assets with their fair
value and determined that the remaining goodwill balance
of $8.1 million was impaired and we, therefore, recorded an
impairment charge of this amount in the accompanying
2002 Consolidated Statement of Income. As of December
31, 2002, there was no remaining goodwill balance on our
balance sheet relating to RSIS.
Loss on Sale of Assets
In the fourth quarter of 2001, we sold and leased back most
of our corporate headquarters at a loss of $44.8 million. In
June 2001, we received $123.6 million for the settlement of
the Computer City, Inc. purchase price and settlement of
the $136.0 million note which was received in connection
with the sale of Computer City, Inc. in 1998. Thus, we
incurred an additional loss from the sale of Computer City,
Inc. of $12.4 million.
Employee Separation and Other Costs
During the third quarter of 2001, as part of our effort to
control operating costs, we incurred approximately $13.5
million in charges related to a reduction of our labor force,
primarily for early retirements and involuntary and volun-
tary employee severance. In addition, during the fourth
quarter of 2001, $4.8 million in charges were incurred relat-
ing to the closure of RSIS’s national commercial installation
business.These costs were primarily comprised of sever-
ance costs, write-offs of certain fixed assets and future lease
commitments.
for the power and technical department. Additionally,
the gross profit percentage improved for our retail support
operations in 2002.
Selling, General and Administrative Expense
Our SG&A expense increased 0.9% in dollars and increased
as a percent of net sales and operating revenues to 37.8%
for the year ended December 31, 2002, from 35.9% for the
year ended December 31, 2001. The dollar increase for 2002
was primarily due to a $29.0 million litigation charge
related to the settlement of a class action lawsuit in
California and a $6.0 million charge to our 1996 restructur-
ing reserve as a result of the bankruptcy of a sub-lessee in a
former Incredible Universe store site. A $14.6 million
increase in our rent expense and lower overall sales in 2002
also contributed to a higher SG&A expense ratio.This was
partially offset by a $7.6 million charge for store closing
costs from 2001, which did not reoccur in 2002. Payroll
expense decreased by $12.3 million to $728.0 million in
2002, but increased slightly as a percent of net sales and
operating revenues to 15.9% in 2002, compared to 15.5% in
2001.The decrease in dollars was due primarily to our
reduction in headcount during the third quarter of 2001.
Rent expense increased by $14.6 million to $244.9 million
in 2002 and increased as a percent of net sales and operat-
ing revenues to 5.4% in 2002 from 4.8% in 2001.These
increases were due primarily to lease renewals and reloca-
tions at higher rates, as well as a slight increase in the
average store size. Advertising expense decreased $12.9
million in 2002 to $241.0 million from $253.9 million in
2001, while remaining at 5.3% of net sales and operating
revenues during both 2002 and 2001.The dollar decrease
was due primarily to an increase in advertising contribu-
tions from our various vendors and third-party service
providers. Insurance expense increased $10.4 million to
$71.0 million in 2002 from $60.6 million in 2001 and
increased as a percent of net sales and operating revenues
to 1.6% in 2002, compared to 1.3% in 2001. As of December
31, 2002, actual losses regarding insurance claims had not
exceeded our expectations.
Depreciation and Amortization
Depreciation and amortization expense decreased $13.6
million dollars to $94.7 million and decreased as a percent
of net sales and operating revenues to 2.0% in 2002 from
2.3% in 2001.These decreases were primarily attributable
to the elimination of goodwill amortization related to RSIS,
as well as the sale of our corporate headquarters, during
the fourth quarter of 2001.