American Home Shield 2006 Annual Report Download - page 67

Notes to the Consolidated Financial Statements
The lattice-based model used the following assumption for options awarded in 2005: range of expected volatility 27.66 percent to
47.56 percent; weighted-average volatility of 28.24 percent; expected life (in years) of 6; dividend yield of 3.41 percent; risk-free
rate in the range of 2.98 percent to 4.65 percent; and the weighted-average risk-free rate of 4.06 percent.
For awards valued using the Black-Scholes option pricing model, the computation of fair value was based on the following
weighted-average assumptions in 2004 and 2003: risk-free rates of 3.7 percent and 3.6 percent, respectively; dividend yields of 4.0
percent and 4.2 percent, respectively; share price volatility of 30.6 percent and 30.8 percent, respectively; and average expected
lives of six to seven years. The Company has estimated the value of these options assuming a single weighted-average expected life
for the entire award.
Options and grant transactions during the last three years are summarized below:
Stock Price Weighted Avg. Share Grants/ Price
Options Range (1) Exercise Price Restricted Stock Range
Total exercisable, December 31, 2002 18,089,830 $ 2.25 – 77.56 $ 13.05 — —
Total outstanding, December 31, 2002 31,813,339 $ 2.25 – 77.56 $ 12.64 232,887 $ 2.86 – 13.80
Transactions during 2003
Granted to employees 2,432,674 $ 8.40 – 11.21 $ 9.91 364,419 $ 9.50 – 11.97
Exercised or vested (1,296,101)$ 6.44 – 11.50 $ 7.70 (56,092) $ 2.86 – 13.80
Terminated or resigned (1,240,146)$ 2.25 – 37.40 $ 13.49 (3,514) $ 9.95
Total exercisable, December 31, 2003 20,346,581 $ 6.44 – 77.56 $ 13.16 — —
Total outstanding, December 31, 2003 31,709,766 $ 6.44 – 77.56 $ 12.60 537,700 $ 3.03 - 13.80
Transactions during 2004
Granted to employees 2,049,680 $ 8.63 – 13.06 $ 10.79 988,309 $ 10.73–12.86
Exercised or vested (1,250,434)$ 6.44 – 11.50 $ 8.20 (109,827) $ 3.03 – 13.80
Terminated or resigned (545,085)$ 6.44 – 37.40 $ 12.57 (16,491) $ 9.95 – 11.17
Total exercisable, December 31, 2004 22,573,344 $ 8.40 – 77.56 $ 13.26 — —
Total outstanding, December 31, 2004 31,963,927 $ 8.40 – 77.56 $ 12.66 1,399,691 $ 3.82 – 13.80
Transactions during 2005
Granted to employees 2,103,103 $ 12.14 – 13.72 $ 13.43 598,723 $ 12.56–13.82
Exercised or vested (2,385,142)$ 8.75 – 13.83 $ 9.90 (270,695) $ 3.82–13.80
Terminated or resigned (2,173,615)$ 8.75 – 37.40 $ 12.26 (144,842) $ 9.95–13.42
Total exercisable, December 31, 2005 22,057,309 $ 8.40 – 77.56 $ 13.33 — —
Total outstanding, December 31, 2005 29,508,273 $ 8.40 – 77.56 $ 12.96 1,582,877 $ 5.53–13.82
(1) The options priced at $77.56 are options assumed by the Company as a result of business acquisitions.
Options outstanding at December 31, 2005:
Weighted Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at 12/31/05 Term Exercise Price at 12/31/05 Exercise Price
$8.40 – 10.78 11,290,694 4 Years $ 10.00 7,869,386 $ 9.86
$10.80 – 15.94 12,351,967 4 Years $ 12.50 8,322,311 $ 12.15
$16.12 – 22.33 5,522,211 3 Years $ 18.18 5,522,211 $ 18.18
$27.20 – 77.56 343,401 1 Year $ 43.25 343,401 $ 43.25
$8.40 – 77.56 29,508,273 3.9 Years $ 12.96 22,057,309 $ 13.33
Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of
shares outstanding for the period. The weighted average common shares for the diluted earnings per share calculation includes the
incremental effect related to outstanding 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 diluted shares in the denominator include the shares issuable upon conversion
of the securities. Due to the losses incurred in 2003, the denominator does not include the effects of options as it would result in a
less dilutive computation. As a result, 2003 diluted earnings per share are the same as basic earnings per share. Had the Company
recognized income from continuing operations in 2003, incremental shares attributable to the assumed exercise of outstanding
options would have increased diluted shares outstanding by 3.9 million shares. Shares potentially issuable under convertible
securities have not been considered outstanding for 2005 and 2003 as their inclusion results in a less dilutive computation. Had the
inclusion of convertible securities not resulted in a less dilutive computation in both 2005 and 2003, incremental shares attributable
to the assumed conversion of the securities would have increased shares outstanding by 8.0 million shares and the after-tax interest
expense related to the convertible securities that would have been added to net income in the numerator would have been $4.9
million and $4.8 million, respectively.
The following table reconciles both the numerator and the denominator of the basic earnings per share from continuing
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