American Home Shield 2004 Annual Report Download - page 45

2004 annual report ServiceMaster 43
shares do not include the effects of options, because doing so
would result in a less dilutive computation. Shares potentially
issuable under convertible securities have not been considered
outstanding in the diluted earnings per share computation
for 2003 and 2002 as their inclusion would result in a less
dilutive computation.
Stock-Based Compensation: Beginning in 2003, the Company
has been accounting for employee stock options as compensation
expense in accordance with SFAS 123, “Accounting for Stock-
Based Compensation.” SFAS 148, “Accounting for Stock-Based
Compensation – Transition and Disclosure, an amendment
of FASB Statement No. 123”, provides alternative methods of
transitioning to the fair-value based method of accounting for
employee stock options as compensation expense. The Company
is using the “prospective method” of SFAS 148 and is expensing
the fair value of new employee option grants awarded subsequent
to 2002.
Prior to 2003, the Company had accounted for employee share
options under the intrinsic method of Accounting Principles
Board Opinion 25, as permitted under GAAP. Compensation
expense determined under the fair-value based method of SFAS
123 relating to newly issued awards as well as the unvested portion
of the previously issued awards would have resulted in proforma
reported net income and net earnings per share as follows:
(In thousands,
except per share data) 2004 2003 2002
Net income (loss)
as reported $ 331,227 $ (224,687) $ 156,994
Add back: Stock-based
compensation expense
included in reported net
income, net of related
tax effects 1,729 609 —
Deduct: Stock-based
compensation expense
determined under fair-
value method, net
of related tax effects (6,346) (6,179) (7,576)
Proforma net income (loss) $ 326,610 $ (230,257) $ 149,418
Basic Earnings Per Share:
As reported $ 1.14 $ (0.76) $ 0.52
Proforma 1.12 (0.78) 0.50
Diluted Earnings Per Share:
As reported $ 1.11 $ (0.76) $ 0.51
Proforma 1.09 (0.78) 0.49
See the “Shareholders’ Equity” note to the Consolidated Financial Statements
for a description of the assumptions used to compute the above stock based
compensation expense.
Newly Issued Accounting Statements and Positions: In
December 2004, the FASB issued SFAS 123 (revised 2004),
“Share-Based Payment” (SFAS 123(R)). This Statement
replaces SFAS 123, “Accounting for Stock-Based Compensation”,
and supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees”. SFAS 123(R) requires that stock options
and share grants be recorded at fair value and this value is
recognized as compensation expense over the vesting period.
The Statement requires that compensation expense be recorded
for newly issued awards as well as the unvested portion of previ-
ously issued awards that remain outstanding as of the effective
date of this Statement. The provisions of this Statement become
effective beginning with the Company’s third quarter 2005
Consolidated Financial Statements. The Company is presently
assessing the impact of this Statement. However, the Company
currently estimates that the adoption of this Statement would
reduce annual earnings per share by approximately $.01 to $.02.
This Statement permits the restatement of periods prior to its
adoption. Upon adopting this Statement, the Company expects
to restate prior periods as if the Statement were in effect for all
periods, resulting in dilution for those periods of a comparable
amount as in 2005.
Recently Adopted Accounting Principles: In 2003, the Financial
Accounting Standards Board (FASB) issued FASB Interpreta-
tion No. 46, “Consolidation of Variable Interest Entities” (FIN
46) and FASB Interpretation No. 46, Revised (FIN 46(R)).
Under these Interpretations, certain entities known as “variable
interest entities” (VIE) must be consolidated by the “primary
beneficiary” of the entity. The primary beneficiary is generally
defined as having the majority of the risks and rewards aris-
ing from the VIE. The requirements of FIN 46 and FIN 46(R)
have been adopted by the Company and their adoption did
not have a material impact on the Company’s Consolidated
Financial Statements.