Radio Shack 2004 Annual Report Download - page 41

to cost of products sold proportionately as the revenues are
recognized. A loss is recognized on extended service contracts
if the sum of the expected costs of providing services pur-
suant to the contracts exceeds the related unearned revenue.
Cost of Products Sold: Cost of products sold includes the
total cost of merchandise inventory sold; costs of services
provided; external and internal freight expenses; distribution
costs; warehousing costs; customer shipping and handling
charges; certain vendor allowances that are not specific,
incremental and identifiable; and physical inventory valua-
tion adjustments and losses.
Vendor Allowances: We receive allowances from third-party
service providers and product vendors through a variety of
promotional programs and arrangements as a result of pur-
chasing and promoting their products and services in the nor-
mal course of business. We consider vendor allowances
received to be a reduction in the price of a vendor's products
or services and record them as a component of cost of prod-
ucts sold when the related product or service is sold, unless
the allowances represent reimbursement of specific, incre-
mental and identifiable costs incurred to promote a vendor's
products and services, in which case we record them when
earned as an offset to the associated expense incurred to pro-
mote the applicable products and/or services.
Advertising Costs: Our advertising costs are expensed the first
time the advertising takes place. We receive allowances from
certain third-party service providers and product vendors
which we record when earned as an offset to advertising
expense incurred to promote the applicable products and/or
services only if the allowances represent reimbursement of
specific, incremental and identifiable costs (see our previous
“Vendor Allowances” discussion). Advertising expense was
$271.5 million, $254.4 million and $241.0 million for the years
ended December 31, 2004, 2003 and 2002, respectively, net
of vendor allowances of $33.9 million, $40.9 million and
$59.6 million, respectively.
Stock-Based Compensation: At December 31, 2004, we had
various stock-based employee compensation plans in use. We
measure stock-based compensation costs under Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees,” and its related interpretations.
Accordingly, no compensation expense has been recognized
for our fixed price stock option plans, as the exercise price of
options must be equal to or greater than the stock price on
the date of grant under our incentive stock plans. The table
below illustrates the effect on net income and net income
available per common share as if we had accounted for our
employee stock options under the fair value recognition
provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 123, “Accounting for Stock-Based Compen-
sation.” For purposes of the pro forma disclosures below,
the estimated fair value of the options is amortized to
expense over the vesting period. We will adopt the provisions
of SFAS No. 123R, “Share-Based Payment,” which was
issued in December 2004, effective July 1, 2005, and will
modify our accounting for stock options and other equity
awards accordingly. See “Recently Issued Accounting
Pronouncements” below.
Year Ended December 31,
(In millions,except per share amounts) 2004 2003 2002
Net income, as reported $337.2 $298.5 $263.4
Stock-based employee compen-
sation expense included in
reported net income,
net of related tax effects 12.8 14.2 14.0
Total stock-based compensation
expense determined under fair
value method for all awards,
net of related tax effects (34.7) (51.1) (60.5)
Pro forma net income $315.3 $261.6 $216.9
Net income available
per common share:
Basic – as reported $ 2.09 $ 1.78 $ 1.50
Basic – pro forma $ 1.96 $ 1.56 $ 1.23
Diluted – as reported $ 2.08 $ 1.77 $ 1.45
Diluted – pro forma $ 1.94 $ 1.55 $ 1.19
The pro forma amounts in the preceding table were
estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Year Ended December 31,
2004 2003 2002
Expected life in years 666
Expected volatility 48.0% 48.3% 46.1%
Annual dividend paid per share $ 0.25 $0.25 $ 0.22
Risk free interest rate 3.3% 3.1% 4.5%
Fair value of options granted
during year $16.28 $9.63 $13.53
Earnings per Share: Basic earnings per share is computed
based only on the weighted average number of common shares
outstanding for each period presented. Diluted earnings per
share reflects the potential dilution that would have occurred
if securities or other contracts to issue common stock were
exercised, converted, or resulted in the issuance of common
stock that would have then shared in the earnings of the entity.
Notes to Consolidated Financial Statements continued
RadioShack Corporation and Subsidiaries
39
AR2004