American Home Shield 2007 Annual Report Download - page 40

Company's debt is fixed rate debt. Therefore, the Company has calculated the expected interest payments on debt outstanding as of
December 31, 2006 to be approximately $49 million, $46 million, $39 million, $29 million, $29 million in 2007, 2008, 2009, 2010,
2011, respectively and $419 million thereafter.
Financial Position - Continuing Operations
The increase in receivables is due primarily to the inclusion of approximately $65 million of InStar receivables (including
approximately $22 million of unbilled work-in-process). InStar's receivables at December 31, 2006 include hurricane disaster
recovery work performed in New Orleans, southern Florida and other hurricane-affected areas. The Company has accounts
receivable from customers that were insured by a family of insurance companies in Florida that are insolvent, and whose claims are
being administered by the Florida Insurance Guaranty Association. The Company expects that collection of these receivables will
be significantly delayed. The aggregate receivable balance due from these customers, net of related reserves, totaled approximately
$9 million at December 31, 2006, and represents the Company's best estimate of the amounts that will ultimately be collected.
Should the Company be unable to collect the balance of these and/or other hurricane-related receivables, it may have to initiate
legal action. While InStar has a history of recovering amounts related to its disaster recovery projects, the current circumstances
increase the uncertainties in estimating the amounts recoverable on certain projects. The allowance for doubtful accounts at
December 31, 2006 reflects the estimated losses resulting from the inability of these customers to make required payments. If the
estimated amounts recoverable on these projects change from the amounts currently recorded, those differences will be recognized
as income or loss when the change in estimate is made.
Inventory levels increased reflecting general business growth. The Company capitalizes sales commissions and other direct contract
acquisition costs relating to termite baiting and pest contracts, as well as home warranty agreements. These costs vary with and are
directly related to a new sale, and are amortized over its initial term. In 2006, these deferred customer acquisition costs declined
reflecting Terminix's continued shift in mix from the bait product to lower priced liquid treatments which because of different
operational protocols, require less revenues and costs to be deferred into future periods. Property and equipment increased from
2005 levels primarily reflecting the InStar acquisition, general business growth and investments in information systems and
productivity enhancing operating systems. The Company does not have any material capital commitments at this time.
The growth in accounts payable reflects an increase in checks written and outstanding, as well as the acquisition of InStar. Deferred
revenue increased, reflecting growth in warranty contracts written at American Home Shield, partially offset by lower customer
prepayment balances for lawn care services as a result of a one month delay in launching prepayment programs for the upcoming
year, as well as a reduction at Terminix associated with the mix shift in termite treatments described above. Growth in other
accrued liabilities primarily reflects the timing of certain payments, as well as increased provisions for litigation reserves.
The Company has minority investors in Terminix. At any time, holders of this minority interest may convert this equity security
into eight million ServiceMaster common shares. The ServiceMaster shares are included in the shares used for the calculation of
diluted earnings per share whenever their inclusion has a dilutive impact. ServiceMaster has the ability to require conversion of the
security into ServiceMaster common shares, once the closing share price of ServiceMaster's common stock averages at least $15
per share for 40 consecutive trading days.
Total shareholders' equity was $1.09 billion and $1.05 billion at December 31, 2006 and 2005, respectively. The increase primarily
reflects operating profits in the business and proceeds from employee share plans, offset in part by cash dividend payments and
share repurchases.
For federal income tax reporting purposes, dividends are considered taxable only when paid out of current or accumulated earnings
and profits, as defined under federal tax laws. As a result of its December 1997 reincorporation, the Company only began
generating corporate earnings and profits for tax purposes in 1998. Since 1998, earnings and profits for tax purposes have been
reduced by dividend payments, amortization of intangible assets that exist for tax reporting purposes only, deductions relating to
business closures and divestitures, and the timing of certain other tax-related items. The Company reported that 11 percent of its
2006 dividends on common stock will be taxable as dividend income for federal income tax purposes. This is lower than the
taxability percentage for 2005 dividends of 87 percent, primarily due to one-time effects of the dispositions of American
Residential Services and American Mechanical Services. Any portion of the dividend that is not taxable would be treated as a return
of capital and would generally be applied to reduce the cost basis of outstanding shares. The Company currently expects that
approximately 55 percent to 65 percent of its 2007 dividends on common stock will be taxable as dividend income for federal
income tax purposes, which is lower than previous projections primarily due to the impact of headquarters relocation costs. The
2007 estimate is subject to change, based on the outcome of future events. The Company expects that the taxable portion of its
dividend will increase sharply in 2008 and will grow to be fully taxable over the succeeding few years.
Financial Position – Discontinued Operations
The assets and liabilities related to discontinued operations have been classified in a separate caption on the Consolidated
Statements of Financial Position. The assets and liabilities of discontinued operations have decreased from the 2005 amounts due to
the sales of the American Residential Services (ARS) and American Mechanical Services (AMS) businesses during 2006. The
remaining liabilities primarily represent ARS and AMS severance and wind-down costs, as well as long-term insurance costs from
other previously discontinued operations.
As part of the ARS and AMS sale agreements, the Company guaranteed obligations to third parties with respect to bonds (primarily
performance and license type), operating leases for which the Company has been released as being the primary obligor, real estate
leased and operated by the buyers, and other guarantees of payment. At the present time, the
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