Radio Shack 2012 Annual Report Download - page 71

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69
Our evaluation of our loss contingencies involves subjective
assessments, assumptions, and judgments, and actual
losses incurred in future periods may differ significantly
from our estimates. Accordingly, although occasional
adverse resolutions may occur and negatively affect our
consolidated financial statements in the period of the
resolution, we believe that the ultimate resolution of our
loss contingencies for which we have not accrued losses
will not materially adversely affect our financial condition.
NOTE 15 – WIRELESS SERVICE PROVIDER
SETTLEMENT AGREEMENT
The business terms of our relationships with our wireless
service providers are governed by our wireless reseller
agreements. These contracts are complex and include
provisions determining our upfront commission revenue,
net of chargebacks for wireless service deactivations; our
acquisition and return of wireless handsets; and, in some
cases, future residual revenue, performance targets and
marketing development funds. Disputes occasionally arise
between the parties regarding the interpretation of these
contract provisions.
Certain disputes arose with one of the Company’s wireless
service providers pertaining to upfront commission revenue
for activations prior to July 1, 2010, and related
chargebacks for wireless service deactivations.
Negotiations regarding resolution of these disputes
culminated in the signing of a settlement agreement in July
2010. In connection with the decision to settle these
disputes, the Company considered the following: the timing
of cash outflows and inflows in connection with the disputed
upfront commission revenue and related chargebacks, and
the estimated future residual revenue; the benefits of
settling the disputes and agreeing to enter into good faith
negotiations with the wireless service provider in the third
quarter of 2010 to modify the commission and chargeback
provisions of our wireless reseller agreement; and the risks
associated with the ultimate realization of the estimated
future residual revenue. Key elements of the settlement
agreement include the following:
• All disputes relating to upfront commission revenue
for activations prior to July 1, 2010, and related
chargebacks were settled.
• The wireless service provider agreed to pay $141
million to the Company on or before July 30, 2010.
• The Company and the wireless service provider
agreed to enter into good faith negotiations in the
third quarter of 2010 to modify the commission and
chargeback provisions of our wireless reseller
agreement.
• Beginning July 1, 2010, the wireless service provider
was no longer obligated to pay future residual
revenue amounts to the Company for a period of
time for customers activated on or before June 30,
2010. For the first six months of 2010, these residual
revenue amounts averaged approximately $9 million
per quarter. Based on this average, we would
receive no residual revenue payments from this
wireless service provider for eight quarters beginning
with the third quarter of 2010 under the terms of the
settlement agreement.
The effects of the settlement agreement have been
reflected in net sales and operating revenues for 2010.
In the third quarter of 2010 and in the first quarter of 2012,
we reached agreements with this wireless service provider
to modify the commission, chargeback, and other
compensation provisions of our wireless reseller
agreement. Based on the terms of the settlement
agreement, the terms of the amended wireless reseller
agreement, and the performance of our business with this
wireless service provider, these events did not have a
material effect on our results of operations in subsequent
periods.
NOTE 16 – SEGMENT REPORTING
We have two reportable segments, U.S. RadioShack
company-operated stores and Target Mobile centers. The
U.S. RadioShack company-operated stores segment
consists solely of our 4,395 U.S. company-operated retail
stores, all operating under the RadioShack brand name.
Our Target Mobile centers segment consists of our network
of 1,522 Target Mobile centers located in Target locations.
We evaluate the performance of our segments based on
operating income, which is defined as sales less cost of
products sold and certain direct operating expenses,
including labor, rent, and occupancy costs. Asset balances
by segment have not been included in the segment table
below, as these are managed on a company-wide level and
are not fully allocated to each segment for management
reporting purposes. Amounts in the other category reflect
our business activities that are not separately reportable,
which include sales to our independent dealers, sales
generated by our Mexican subsidiary and our
www.radioshack.com website, sales to commercial
customers, and sales to other third parties through our
global sourcing operations. In October 2012, we exercised
our contractual right to notify Target of our intention to stop
operating the Target Mobile centers if we could not amend
the current arrangement. An acceptable arrangement was
not negotiated; therefore, we will exit this business by April
8, 2013.