Circuit City 2005 Annual Report Download - page 51

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.
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 Per Common Share
– The Company calculates net income per share in accordance with SFAS 128,
“Earnings Per Share.” Net income per common share-basic was calculated based upon the weighted average
number of common shares outstanding during the respective periods presented. Net income 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 is 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. Equivalent common shares of 842,000 in 2005, equivalent common shares of 1,116,000 in
2004 and equivalent common shares of 715,000 in 2003 were included for the diluted calculation. The weighted
average number of stock options outstanding excluded from the computation of diluted earnings per share was
503,000 in 2005, 587,000 in 2004 and 697,000 in 2003 due to their antidilutive effect.
Comprehensive Income) — Comprehensive income consists of net income and foreign currency translation
adjustments and is included in the Consolidated Statements of Shareholders’ Equity. Comprehensive income was
$8,414,000 in 2005, $12,175,000 in 2004 and $7,270,000 in 2003.
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 9. 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 and earnings 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):
2005
2004
2003
Net income
-
as reported
$11,441
$10,188
$3,207
Add: Stock
-
based employee compensation expense included in
reported net income, net of related tax effects
647
886
Deduct: Stock
-
based employee compensation expense
determined under fair value based method, net of
related tax effects
915
1,295
544
Pro forma net income
$11,173
$9,779
$2,663
Basic net income per common share:
Net income
-
as reported
$.33
$.30
$.09
Net income
-
pro forma
$.32
$.28
$.08
Diluted net income per common share:
Net income
-
as reported
$.31
$.29
$.09
Net income
-
pro forma
$.31
$.28
$.08