American Home Shield 2003 Annual Report Download - page 43

ServiceMaster    41
(service costs for termite contracts and claim costs for war-
ranty contracts) are expensed as incurred. The Company
recognizes revenue over the life of these contracts in pro-
portion to the expected direct costs. Revenue from trade
name licensing arrangements is recognized when earned.
Franchised revenues (which in the aggregate represent less
than three percent of consolidated revenue) consist principally
of continuing monthly fees based upon the franchisee’s
customer level revenue. Monthly fee revenue 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 conditions
relating to the sale have been substantially performed. Total
franchise fee income (excluding trade name licensing) com-
prised 13 percent, 11 percent and 10 percent of consolidated
operating income before impairment charges in 2003, 2002
and 2001,respectively.The portion of total franchise fee income
related to initial fees received from the sale of a franchise
were immaterial to the Company’s consolidated financial
statements for all periods.
The Company had $420 million and $397 million of deferred
revenues at December 31, 2003 and 2002, respectively, which
consist primarily of payments received for annual contracts
relating to home warranty, termite baiting and lawn care
services. The revenue related to these services is recognized
as the service is performed over the contractual period.
Deferred Customer Acquisition Costs: 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.
Interim Reporting: TruGreen ChemLawn has significant
seasonality in its business. In the winter and early spring, this
business sells a series of lawn applications to customers
which are rendered primarily in March through October.
The Company incurs incremental selling expenses at the
beginning of the year that directly relate to successful sales in
which the revenues will be recognized in later quarters. This
business also defers,on an interim basis, pre-season advertising
costs and annual repairs and maintenance procedures that
are performed in the first quarter. These costs are deferred
and recognized in proportion to the contract revenue over the
production season,and are not deferred beyond the calendar
year-end.
Advertising: As discussed in the “Interim Reporting”note
above, TruGreen’s pre-season advertising costs are deferred
and recognized approximately in proportion to the contract
revenue over the year. The cost of direct-response advertising
at Terminix is capitalized and amortized over its expected
period of future benefits. This direct-response advertising
consists primarily of direct-mail promotions, for which the
cost is capitalized and amortized over the one-year customer
contract life. For all other advertising, the Company expenses
the cost of advertising the first time the advertising takes
place. Terminix also defers its advertising costs in the first
quarter and recognizes expense over the year. These costs are
not deferred beyond the calendar year-end.
Inventory Valuation: Inventories are valued at the lower
of cost (first-in, first-out basis) or market. The inventory
primarily represents finished goods to be used on the cus-
tomers’premises or sold to franchisees.
Property and Equipment, Intangible Assets and
Goodwill: Buildings and equipment used in the business
are stated at cost and depreciated over their estimated useful
lives using the straight-line method for financial reporting
purposes. The estimated useful lives for building and
improvements range from 10 to 40 years,while the estimated
useful lives for equipment range from three to 10 years.
Leasehold improvements relating to leased facilities are
depreciated over the remaining life of the lease. Technology
equipment as well as software and development have an
estimated useful life of three to seven years. Intangible assets
consist primarily of goodwill ($1.5 billion), trade names
($205 million) and other intangible assets ($12 million). As
required by SFAS 142 beginning in 2002, goodwill is not
subject to amortization and intangible assets with indefinite
useful lives are not amortized until their useful lives are
determined to no longer be indefinite. Goodwill and intan-
gible assets that are not subject to amortization are subject to
an assessment for impairment by applying a fair-value based
test on an annual basis or more frequently if circumstances
indicate a potential impairment. As discussed in the “Good-
will and Intangible Assets”note to the consolidated financial
statements, during the third quarter of 2003 the Company
recorded a pre-tax non-cash impairment charge of $481
million relating to TruGreen LandCare,ARS and AMS.
As discussed in the “2001 Charge”section in the Notes to Con-
solidated Financial Statements, in the course of completing
its portfolio review, the Company recorded impairment
charges in 2001 related to goodwill of TruGreen LandCare
and the United Kingdom Terminix operations. The impair-
ment losses recorded were the excess of the recorded book
values over their corresponding estimated fair values.
Notes to Consolidated Financial Statements