American Home Shield 2005 Annual Report Download - page 39

P. 3 7 SERVICEMASTER 2005 ANNUAL REPORT
Earnings Per Share: Basic earnings per share is based on
the weighted-average number of common shares out-
standing during the year. The weighted average number of
common shares used in the diluted earnings per share
calculation include the incremental effect related to out-
standing options and stock appreciation rights (SARS)
whose market price is in excess of the grant price. Shares
potentially issuable under convertible securities have been
considered outstanding for purposes of the diluted earnings
per share calculations. In computing diluted earnings per
share, the after-tax interest expense related to convertible
securities is added back to net income in the numerator,
while the number of shares used in the denominator include
the shares issuable upon conversion of the securities.
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. 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) 2005 2004 2003
Net income (loss) as
reported $ 198,925 $ 331,227 $ (224,687)
Add back: Stock-based
compensation expense
included in reported net
income, net of related
tax effects 2,280 1,729 609
Deduct: Stock-based
compensation expense
determined under fair-
value method, net of
related tax effects (5,742) (6,346) (6,179)
Proforma net income (loss) $ 195,463 $ 326,610 $ (230,257)
Basic Earnings Per Share:
As reported $ 0.68 $ 1.14 $ (0.76)
Proforma 0.67 1.12 (0.78)
Diluted Earnings Per Share:
As reported $ 0.67 $ 1.11 $ (0.76)
Proforma 0.66 1.09 (0.78)
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
previously 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
2006 fiscal year (January 1, 2006). The Company had
previously disclosed that it had expected to restate prior
periods as if this Statement were in effect for all periods. As
permitted by this Statement, the Company will instead
prospectively apply the provisions of this Statement effective
January 1, 2006. The Company currently estimates that
the adoption of this Statement will reduce earnings per
share in 2006 by approximately $.01.
Recently Adopted Accounting Principles: The Company
adopted the provisions of FASB Interpretation 47,
“Accounting for Conditional Asset Retirement Obligations”
(FIN 47), an interpretation of FASB Statement 143
“Accounting for Asset Retirement Obligations (SFAS 143).
FIN 47 clarifies that an entity is required to recognize a liability
for a conditional asset retirement obligation when incurred
if the fair value of the obligation can be reasonably estimat-
ed. This interpretation further clarified the term “conditional
asset retirement obligation”, as used in SFAS 143, as a
legal obligation to perform an asset retirement activity in
which the timing and/or method of settlement are condi-
tional on a future event that may or may not be within
control of the entity. FIN 47 is effective for companies no
later than the end of their first fiscal year ending after
December 15, 2005. The adoption of FIN 47 did not have a
significant impact on the Company.
Notes to the Consolidated Financial Statements