American Home Shield 2004 Annual Report Download - page 36

34 ServiceMaster 2004 annual report
in an impairment would be remote. For the 2004 goodwill and
trade name impairment review, the Company carried forward
the valuations for all reporting units except ARS. A valuation
analysis performed for ARS indicated no impairment issue.
Revenue from lawn care, pest control, liquid and fumigation
termite applications, as well as heating/air conditioning and
plumbing services are recognized as the services are provided.
Revenue from landscaping services are recognized as they are
earned based upon monthly contract arrangements or when
services are performed for non-contractual arrangements.
Revenue from the Company’s commercial installation con-
tracts, primarily relating to HVAC and electrical installations
are recognized on the percentage of completion method in the
ratio that total incurred costs 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, frequently 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 proportion to
the expected direct costs. Revenue from trade name licensing
arrangements is recognized when earned. Franchised revenue
consists principally of monthly fee revenue, which is recognized
when the related customer level revenue is reported by the fran-
chisee and collectibility is assured. Franchise revenue also
includes initial fees resulting from the sale of franchises. These
fees are fixed and are recognized as revenue when collectibility
is assured and all material services or conditions 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 recog-
nized. 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 December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards 123
(revised 2004), “Share-Based Payment” (SFAS 123 (R)). This
Statement replaces SFAS 123, “Accounting for Stock-Based
Compensation”, and supercedes 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 out-
standing as of the effective date of this Statement. The provisions
of this Statement become effective with the Company’s third
quarter 2005 Consolidated Financial Statements. The Company
is presently assessing the impact of this Statement, and currently
estimates that its adoption would reduce annual earnings per
share by approximately $.01 to $.02. This Statement permits the
restatement of periods prior to its adoption. Upon adoption, 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.
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 statements, 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; changes in competition in the markets served by the
Company; labor shortages or increases in wage rates; unexpected
increases in operating costs, such as higher insurance premiums, self
insurance and healthcare claim costs; higher fuel prices; changes in the
types or mix of the Company’s service offerings or products; increased
governmental regulation, including telemarketing; general economic
conditions in the United States, especially as they may affect home sales
or consumer spending levels; 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