American Home Shield 2006 Annual Report Download - page 61

Notes to the Consolidated Financial Statements
(In thousands)
Balance at
Dec. 31,
2004
Cash
Payments
or Other Income/
(Expense)
Balance at
Dec. 31,
2005
Remaining liabilities of discontinued operations:
LandCare Construction $ 4,492 $ 2,365 $ (985) $ 3,112
LandCare utility line clearing business 6,616 2,843 535 3,238
Certified Systems, Inc. and other 8,485 1,325 (2,526) 9,686
International Businesses (1) 11,000 — 11,000 —
(1) The 2005 activity reflects the favorable conclusion of certain obligations related to the previously sold international pest
control operations.
Commitments and Contingencies
The Company leases certain property and equipment under various operating lease arrangements. Most of the property leases
provide that the Company pay taxes, insurance and maintenance applicable to the leased premises. As leases for existing locations
expire, the Company expects to renew the leases or substitute another location and lease.
Rental expense for 2005, 2004 and 2003 was $163 million, $147 million and $135 million, respectively. Future long-term non-
cancelable operating lease payments are approximately $80 million in 2006, $64 million in 2007, $49 million in 2008, $37 million
in 2009, $21 million in 2010, and $26 million in 2011 and thereafter.
The majority of the Company's fleet and some equipment are leased through operating leases. Lease terms are non-cancelable for
the first twelve month term and then are month-to-month leases, cancelable at the Company's option. There are residual value
guarantees (ranging from 70 percent to 87 percent depending on the agreement) on these vehicles and equipment, which historically
have not resulted in significant net payments to the lessors. There are no net payments reflected in the future minimum lease
obligation as the leases are cancelable and there are no expected net payments due under the guarantees. At December 31, 2005
there was approximately $259 million of residual value guarantee relating to the Company's fleet and equipment leases. The fair
value of the assets under the leases is expected to fully mitigate the Company's obligations under the agreements.
The Company maintains operating lease facilities with banks totaling $68 million which provide for the financing of branch
properties to be leased by the Company. At December 31, 2005, approximately $68 million was funded under these facilities.
Approximately $15 million of these leases have been included on the balance sheet as assets with related debt as of December 31,
2005. The balance of the funded amount is treated as operating leases. Approximately $15 million of the total facility expires in
January 2008 and $53 million expires in September 2009. The Company has guaranteed the residual value of the properties under
the leases up to 82 percent of the fair market value at the commencement of the lease. At December 31, 2005, the Company's
residual value guarantee related to the leased assets totaled $56 million for which the Company has recorded the estimated fair
value of this guarantee (approximately $0.9 million) in the Consolidated Statements of Financial Position.
In the normal course of business, the Company periodically enters into agreements that incorporate indemnification provisions.
While the maximum amount which the Company may be exposed under such agreements cannot be estimated, the Company does
not expect these guarantees and indemnifications to have a material adverse effect on its Consolidated Financial Statements.
The Company carries insurance policies on insurable risks at levels which it believes to be appropriate, including workers'
compensation, auto and general liability risks. The Company has self-insured retention limits and insured layers of excess insurance
coverage above such self-insured retention limits. Accruals for self-insurance losses, termite damage claims in the Terminix
business and warranty claims in the American Home Shield business are made based on the Company's claims experience and
actuarial assumptions. In 2005, Terminix recorded a $10 million unfavorable correction in estimating prior years' termite damage
claim reserves. At December 31, 2005, these accruals totaled $211 million, with $93 million included in "Self-insured claims and
related expenses" and $118 million included in "Other long-term obligations" in the accompanying Consolidated Statements of
Financial Position. The Company has certain liabilities with respect to existing or potential claims, lawsuits, and other proceedings.
The Company accrues for these liabilities when it is probable that future costs will be incurred and such costs can be reasonably
estimated.
In the ordinary course of conducting its business activities, the Company becomes involved in judicial, administrative and
regulatory proceedings involving both private parties and governmental authorities. These proceedings include general and
commercial liability actions and a small number of environmental proceedings. The Company does not expect any of these
proceedings to have a material adverse effect on its Consolidated Financial Statements.
Employee Benefit Plans
Discretionary contributions to qualified profit sharing and non-qualified deferred compensation plans were made in the amount of
$9.9 million for 2005, $9.3 million for 2004 and $4.6 million for 2003. Under the Employee Share Purchase Plan, the Company
contributed $.8 million in 2005, 2004 and 2003. These funds defrayed part of the cost of the shares purchased by employees.
Minority Interest Ownership and Related Parties
The Company continues to have minority investors in Terminix. This minority ownership reflects an interest issued to the prior
owners of the Allied Bruce Terminix Companies in connection with the acquisition of that entity. At any time, the former owners
may convert this equity security into eight million ServiceMaster common shares. The ServiceMaster shares are included in the