American Home Shield 2006 Annual Report Download - page 65

Notes to the Consolidated Financial Statements
ServiceMaster Funding LLC has entered into an agreement to transfer, on a revolving basis, an undivided percentage ownership
interest in a pool of accounts receivable to unrelated third party purchasers. ServiceMaster Funding LLC retains an undivided
percentage interest in the pool of accounts receivable and bad debt losses for the entire pool are allocated first to this retained
interest. During 2005, 2004 and 2003, there were no receivables sold to third parties under this agreement. However, the Company
may sell its receivables in the future which would provide an alternative funding source. The agreement is a 364-day facility that is
renewable at the option of the purchasers. The Company may sell up to $70 million of its receivables to these purchasers and
therefore has immediate access to cash proceeds from these sales. The amount of the eligible receivables varies during the year
based on seasonality of the business and will at times limit the amount available to the Company.
Comprehensive Income
Comprehensive income, which encompasses net income, unrealized gains on marketable securities, and the effect of foreign
currency translation is disclosed in the Statements of Shareholders' Equity.
Other Comprehensive Income
(In thousands) 2005 2004 2003
Net unrealized holding gains arising in period $ 4,582 $ 7,745 $ 15,559
Tax expense 1,833 3,098 6,224
Net of tax amount $ 2,749 $ 4,647 $ 9,335
Net gains realized $ 8,228 $ 6,370 $ 3,855
Tax expense 3,291 2,549 1,542
Net of tax amount $ 4,937 $ 3,821 $ 2,313
Accumulated comprehensive income included the following components as of December 31:
(In thousands) 2005 2004 2003
Net unrealized gains on securities, net of tax $ 4,624 $ 6,812 $ 5,986
Foreign currency translation 2,573 3,992 1,946
Total $ 7,197 $ 10,804 $ 7,932
Shareholders' Equity
The Company has authorized one billion shares of common stock with par value of $.01. In February 2006, the Company
announced the declaration of a cash dividend of $.11 per share payable on February 28, 2006 to shareholders of record on February
17, 2006.
The Company has an effective shelf registration statement to issue shares of common stock in connection with future, unidentified
acquisitions. This registration statement allows the Company to issue registered shares much more efficiently when acquiring
privately held companies. The Company plans to use the shares over time in connection with purchases of small acquisitions. There
were approximately 4.3 million shares available for issuance under this registration statement at December 31, 2005.
As of December 31, 2005, there were 32 million Company shares available for issuance upon the exercise of employee stock
options outstanding and future grants. Stock options are issued at a price not less than the fair market value on the grant date and
expire within ten years of the grant date. Certain options may permit the holder to pay the option exercise price by tendering
Company shares that have been owned by the holder without restriction for an extended period. Share grants and restricted stock
awards carry a vesting period and are restricted as to the sale or transfer of the shares. Restricted stock awards are non-transferable
and subject to forfeiture if the holder does not remain continuously employed by the Company during the vesting period, or if the
restricted stock is subject to performance measures, if those performance measures are not attained. The Company includes the
vested and unvested portions of the restricted stock awards in shares outstanding in the denominator of its earnings per share
calculations.
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). SFAS 123(R) replaces
SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123), 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 adoption of this
Statement. The requirements of SFAS 123(R) 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 the 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.
In the first quarter of 2003, the Company adopted SFAS 123 and has been expensing the fair value of new employee option grants
awarded subsequent to 2002 using the prospective method as described in SFAS 148, "Accounting for Stock-Based Compensation
– Transition and Disclosure, an amendment of FASB Statement No. 123".
Beginning in 2005, the fair value of each option award was estimated on the date of the grant using a lattice-based option valuation
model. Prior to 2005, the Company used the Black-Scholes option pricing model. This change was made in order to provide a better
estimate of fair value, as the lattice-based model reflects the impact of stock price changes on exercise behavior, and changes in
volatility and interest rates.