American Home Shield 2003 Annual Report Download - page 36

34    ServiceMaster
Revenues from lawn care, pest control, liquid and fumiga-
tion termite applications, as well as heating/air conditioning
and plumbing services are recognized as the services are
provided. Revenues from landscaping services are recognized
as they are earned based upon monthly contractual arrange-
ments or when services are performed for non-contractual
arrangements. Revenues from the Company’s commercial
installation contracts, primarily relating to HVAC, are recog-
nized using the percentage of completion method, based
on the ratio that total costs incurred to date bear to total
estimated costs. The Company eradicates termites through
the use of baiting stations, as well as through non-baiting
methods (e.g., fumigation or liquid treatments). Termite
services using baiting stations as well as home warranty
services typically are sold through annual contracts for a
one-time, upfront payment. Direct costs of these contracts
(service costs for termite contracts and claim costs for
warranty contracts) are expensed as incurred.The Company
recognizes revenue over the life of these contracts in propor-
tion to the expected direct costs. Revenue from trade name
licensing arrangements is recognized when earned.Franchised
revenues consist principally of monthly fee revenue, which is
recognized when the related customer level revenue is reported
by the franchisee and collectibility is assured. Franchise
revenue also includes initial fees resulting from the sale of a
franchise.These fees are fixed and are recognized as revenue when
collectibility is assured and all material services or condi-
tions relating to the sale have been substantially performed.
Customer acquisition costs, which are incremental and
direct costs of obtaining a customer, are deferred and
amortized over the life of the related contract in proportion
to revenue recognized.These costs include sales commissions
and direct selling costs which can be shown to have resulted
in a successful sale.
Newly Issued Accounting
Statements and Positions
In January 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46,“Consolidation of
Variable Interest Entities”(FIN 46). Under this Interpreta-
tion, 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 arising from
the VIE. In December 2003, the FASB issued FASB Interpre-
tation No. 46, Revised December 2003 (FIN 46R), which
revised the originally issued document to include, among
other items, additional exclusion provisions for which an
entity would not be required to apply FIN 46. Certain
requirements of FIN 46R are required to be applied no later
than the first quarter of 2004. The Company is currently
assessing the impact of FIN 46R and does not expect its
adoption to have a material impact on the Consolidated
Financial Statements.
Forward-Looking Statements
The Company’s Annual Report contains or incorporates by
reference statements concerning future results and other matters
that may be deemed to be “forward-looking statements”within
the meaning of the Private Securities Litigation Reform Act of
1995. The Company intends that these forward-looking state-
ments, which look forward in time and include everything other
than historical information, be subject to the safe harbors created
by such legislation. The Company notes that these forward-
looking statements involve risks and uncertainties that could
affect its results of operations, financial condition or cash flows.
Factors that could cause actual results to differ materially from
those expressed or implied in a forward-looking statement
include the following (among others): weather conditions that
affect the demand for the Company’s services; competition in
the markets served by the Company; labor shortages or increases
in wage rates; unexpected increases in operating costs, such as
higher insurance and self-insurance costs, higher healthcare or
fuel prices; increased governmental regulation, including
telemarketing; general economic conditions in the United
States, especially as they may affect home sales or consumer
spending levels; time and expenses associated with integrating
and winding down businesses; and other factors described from
time to time in documents filed by the Company with the
Securities and Exchange Commission.
Management Discussion and Analysis of
Financial Condition and Results of Operations