Circuit City 2004 Annual Report Download - page 45

2004 2003 2002
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Net income (loss) - as reported $10,188 $3,207 $(58,410)
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 886
Deduct: Stock-based employee compensation expense
determined under fair value based method, net of
related tax effects 1,295 544 713
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Pro forma net income (loss) $9,779 $2,663 $(59,123)
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incurred. Such expenses were approximately $411,000 for the year ended December 31, 2004, $800,000 for the
year ended December 31, 2003 and $1,036,000 for the year ended December 31, 2002.
Derivative Financial Instruments
- In accordance with the provisions of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, all of the Company's derivative financial instruments are
recognized as either assets or liabilities in the consolidated balance sheets based on their fair values. Changes in
the fair values are reported in earnings or other comprehensive income depending on the use of the derivative and
whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for as either a
hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow
hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in other
comprehensive income. Changes in fair values related to fair value hedges as well as the ineffective portion of
cash flow hedges are recognized in earnings (see Note 6).
The Company does not use derivative instruments for speculative or trading purposes. Derivative instruments
may be used to manage exposures related to changes in foreign currency exchange rates and interest rate risk on
variable rate indebtedness.
Net Income (Loss) Per Common Share
- The Company calculates net income (loss) per share in accordance with
SFAS 128, "Earnings Per Share". Net income (loss) per common share-basic was calculated based upon the
weighted average number of common shares outstanding during the respective periods presented. Net income
(loss) per common share-diluted was calculated based upon the weighted average number of common shares
outstanding and included the equivalent shares for dilutive securities outstanding during the respective periods
except in loss periods, where the effect is anti-dilutive. The dilutive effect of outstanding options issued by the
Company are reflected in net income per share – diluted using the treasury stock method. Under the treasury
stock method, options will only have a dilutive effect when the average market price of common stock during the
period exceeds the exercise price of the options. In 2004, 1,116,000 of equivalent common shares and in 2003,
715,000 of equivalent common shares were included for the diluted calculation. The weighted average number of
stock options outstanding excluded from the computation of diluted earnings per share was 587,000 in 2004,
697,000 in 2003 and 1,149,000 in 2002 due to their antidilutive effect.
Comprehensive Income (Loss) - Comprehensive income (loss) consists of net income (loss) and foreign currency
translation adjustments and is included in the Consolidated Statements of Shareholders' Equity. Comprehensive
income (loss) was $12,175,000 in 2004, $7,270,000 in 2003 and $(52,502,000) in 2002, net of tax effects on
foreign currency translation adjustments of $(1,180,000) in 2004, $(3,030,000) in 2003 and $3,483,000 in 2002.
Stock-based Compensation - The Company has three stock-based compensation plans, two of which are for
employees, consultants and advisors and the third of which is for non-employee directors, which are more fully
described in Note 8. The Company has elected to follow the accounting provisions of Accounting Principles
Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees" for stock-based compensation and to
provide the pro forma disclosures required under SFAS 148, "Accounting for Stock-based Compensation –
Transition and Disclosure". No stock-based employee compensation cost is reflected in net income (loss), as all
options granted under the plans have an exercise price equal to the market value of the underlying stock on the
date of grant. The following table illustrates the effect on net income (loss) and earnings (loss) per share had
compensation costs of the plans been determined under a fair value alternative method as stated in SFAS 123,
"Accounting for Stock
-
Based Compensation" (in thousands, except per share data):